The Kansas Court of Appeals recently reversed a decision by the District Court that set aside the opinion of the Kansas Board of Tax Appeals. At the center of the case was the valuation methodology employed by the taxing jurisdiction’s appraiser. The Court of Appeals found that the jurisdiction’s expert witness not only erred, but also violated USPAP by valuing the various segments of the property and summing the individual values to arrive at an overall valuation conclusion. The court relied upon USPAP Standard Rule 1-4(e):

“Pursuant to USPAP Standard Rule 1-4(e) (2001), an appraiser must analyze the effect on value, if any, of the assemblage of the various estates or component parts of a property and refrain from valuing the whole solely by adding together the individual values of the various estates or component parts. Although the value of the whole may be equal to the sum of the separate estates or parts, it also may be greater or less than the sum of such estates or parts. Therefore, the value of the whole must be tested by reference to appropriate data and supported by an appropriate analysis of such data.”

The Court goes on to state:

“There is no question that Kubert violated USPAP Rule 1-4(e). In executing each of his approaches to value, Kubert segmented the property, valued each segment individually, and then added the values to get his final valuation.”

The case can be found here.

As property tax professionals we rely on market information to support our cases for reducing assessments. Of course, all information is not created equal. Now, more than ever, it is extremely important to dig deep when it comes to the information gathering process.

We are starting to see a trickle of transactions (both sales and leases) after the severe drought we have been experiencing. However, many property owners are being creative (or desperate) in order to sell or lease their properties. This is where the necessity of proper research comes into play. Knowing as much about a transaction as possible will paint a more accurate picture of the market and ultimately valuations.

When researching sales it is important to keep in mind that many property owners have found themselves in a bind, to say the least. Almost $165 billion in commercial loans are coming due this year as landlords struggle with rental rate and occupancy declines and higher cap rates. This is creating problems with refinancing and/or keeping current on loans. Defaults, foreclosures and bankruptcies are plentiful right now and in the opinion of many industry professionals this trend will continue into 2010. So, when researching sales it is very important to know the conditions of the sale and the motivations of the participants.

When it comes to leases, landlords are getting creative in order to maintain occupancies or fill vacancies. Free rent periods, reduced rent and significant tenant improvement allowances are just a few of the many concessions being offered to tenants. These concessions are important because they affect effective rent.

The point being that what appears to be the deal on the surface may be something quite different underneath.

Illinois recently enacted HB 4120 regarding the abatement of taxes for businesses that occupy a previously vacant property. The Act states:

“Upon a majority vote of its governing body, any taxing district  may, after the determination of the assessed valuation of its property, order the county clerk to abate any portion of its taxes on any property if (i) a new business first occupies a facility located on the property during the taxable year, and (ii) the facility was vacant for a period of at least 24 continuous months prior to being occupied by the business. The abatement shall not exceed a period of 2 years and the aggregate amount of abated taxes for all taxing districts combined shall not exceed $4,000,000.”

Given the amount of vacant property on the market, this should prove to be an effective tax savings tool for Illinois businesses.

The California State Board of Equalization recently released a draft of the proposed Guidelines for Substantiating Additional Obsolescence for Personal Property and Fixtures as part of a project to assist county assessors’ staff in identifying and quantifying obsolescence for personal property tax valuation.

Although the proposed guidelines do not offer anything that can be considered groundbreaking, they do serve as an overview of the process for identifying and calculating extraordinary obsolescence.

1^st installment tax bills in Cook County have historically been computed at 50% of the property taxes paid for the preceding year. With the passage of S.B. 2125, 1^st installment tax bills will be computed at 55% of the preceding year’s tax bills. Taxpayers in Cook County will want to accrue accordingly.

In the recent decision of Huang v. Department of Revenue The Oregon Tax Court denied a taxpayer’s request for a reduction in the property tax valuation of a motel due to the taxpayer’s failure to prove the valuation of intangible business property. 

The taxpayer purchased a motel and the sales agreement allocated a portion of the purchase price to “land and buildings” and a portion to “Trade Name and Goodwill”. The taxpayer sought to have the ”Trade Name and Goodwill”  portion excluded from the purchase price in order to arrive at the value for property tax purposes. The Tax Court found that: 

“Taxpayers’ actions and Huang’s testimony fail to provide an explanation for why the Sales Agreement allocated the sales price among ‘Land and Buildings’ and ‘Trade [N]ame and Goodwill’” 

In fact, the actions of the taxpayer both prior to the sale and subsequently seem to indicate the trade name had minimal, if any, value (they changed the name of the hotel after the sale) or that goodwill was properly valued (Haung testified that he did not know the manner in which the seller operated the business prior to the sale).

The MIT Center for Real Estate recently released its 2009 Q2 Transaction-Based Index indicating an 18.1% decline in commercial real estate sale prices compared to the 1^st quarter and, are you ready for this, a 39.2% decline from the peak in the 2^nd quarter of 2007. 

Some good news is that their summary analysis states: 

“The big news this quarter is not just the magnitude of the drop, but the fact that transaction volume actually increased in the presence of this decline, the first volume increase since last summer,” 

A pick up in transaction volume is a welcome sight to us property tax folks.

In the recent case of Level 3 Communications, LLC v. Arizona Department of Revenue, the Arizona Court of Appeals affirmed the Arizona Tax Court’s decision rejecting the taxpayer’s claims of obsolescence regarding the valuation of personal property. 

The taxpayer’s contention was that the utility and salability of its property were impaired as a result of  overbuilding its network of fiber and conduit. 

The Court of Appeals agreed with the Tax Court’s opinion that obsolescence cannot be established by factors within the taxpayer’s control. In its decision the Tax Court states: 

“Taxpayer’s evidence did not satisfy its requirements because ‘the loss in value of the property was not caused by obsolescence.’ Rather, ‘Level 3 simply underestimated the future supply of fiber-optic capacity. Mere erroneous business judgment does not create obsolescence.’” 

The Tax Court relied heavily upon the Eurofresh case in arriving at its decision.

In the recent post A Good Big Box Property Tax Appeal Case I discussed a decision by the Supreme Court of Ohio that I thought was a taxpayer friendly opinion that accurately reflected the realities of the big box retail market. Well, it appears as though the Supreme Court has said, “not so fast” with the decision of Meijer Stores Ltd. V. Franklin Cty. Bd. of Revision, in which an almost complete reversal of position was taken regarding obsolescence and the market for big box retail stores. 

It is interesting to note that the BTA decided both the Target case and the Meijer case on the same day. The major difference being that in the Target case the school board did not appear and the county did not present any evidence to counter the appraisal and testimony of the taxpayer’s expert. 

So, I guess what the BTA and Supreme Court are saying is that if you want to make this argument you better hope that no one shows up to rebut the evidence.

Two fairly recent actions taken by state legislatures have “addressed” (I use the term very loosely) the effects of foreclosures on property tax assessments. 

Tennessee recently enacted H.B. 2175, which states: 

“In a year of reappraisal, if the number of foreclosures is of a significant number in any area or neighborhood, the assessor of property may recognize the effects of such foreclosures on the values of other properties located within the affected area or neighborhood.” 

Texas passed H.B.1038 stating: 

“Notwithstanding Section 1.04(7)(C), in determining the market value of a residence homestead, the chief appraiser may not exclude from consideration the value of other residential property that is in the same neighborhood as the residence homestead being appraised and would otherwise be considered in appraising the residence homestead because the other residential property: (1) was sold at a foreclosure sale conducted in any of the three years preceding the tax year in which the residence homestead is being appraised and was comparable at the time of sale based on relevant characteristics with other residence homesteads in the same neighborhood; or (2) has a market value that has declined because of a declining economy.” 

I bring these up because, although I think they are fairly weak statements when it comes to addressing the current economy’s effects on assessments and property taxes, I think that they are examples of tools to keep in our pockets when it comes to protesting excessive tax assessments. 

The way I see it is that, even though both of these bills specifically address foreclosures and the TX bill specifically addresses resident homesteads, taxpayers should apply these bills to virtually any property type. It’s not as though the residential sector is the only sector of real estate that is in turmoil. If foreclosures are going to be addressed, then it is only reasonable to address distressed assets, bankruptcies, etc. Just about every type of real estate is feeling pain these days and tax assessments should be addressed accordingly.