Anyone that has been involved in property tax appeals in Ohio is, most likely, aware of the deciding bodies’ affection for using a property’s purchase price to establish it’s True Value.  Sometimes the decisions make sense, sometimes they’re questionable and sometimes they will leave you scratching your head. The recently decided case of FirstCal Industrial 2 Acquisitions, L.L.C. v. Franklin Cty. Bd. of Revision Et Al. falls into the latter bucket.

In October 2005 (approx. 10 months after the tax lien date) FirstCal purchased 72 warehouse buildings in Ohio. Five of the properties were located in Franklin County. FirstCal filed a conveyance-fee statement reporting a bulk sale price of approx. 34.3 million for the five Franklin County properties. This, of course, represented an allocation of the total price paid for the entire 72 property portfolio. There was no allocation per property on the conveyance-fee statement or in the purchase contract.

The School Boards in the districts where the properties were located appealed the auditor’s value and sought increases. In their complaints the School Boards arrived at new values by:

(1) determining each parcel’s percentage of the aggregate value assessed as to all parcels by the auditor and then (2) applying that percentage to the $34,336,121 sale price.

The BOR, BTA and the Supreme Court all agreed that this was an appropriate way to arrive at the value of the properties for tax purposes.

Really? No appraisals, no allocation on either the buyer or seller’s part, and applying an allocation of an allocation  according to a flawed formula is an appropriate way to arrive at the fair market value of a property?

If, after reading The Supreme Court’s decision, you find yourself wanting to read the BTA decision as well, you can find it here

In the recently decided case of  Stinson v. Trimas Fasteners, Inc. the Tax Court of Indiana affirmed the decision of the Indiana Board of Tax Review finding in favor of the taxpayer’s claim of overvaluation for property tax purposes. 

Trimas initially challenged the 2002 assessment of their manufacturing facility. The PTABOA reduced the original assessment of $7,762,600 to $7,212,300. Trimas appealed the decision to the Indiana Board. 

Before the Indiana Board Trimas offered an appraisal estimating the value at $2,960,000. The assessor, on the other hand, offered an appraisal estimating the value at $8,000,000.  The large discrepancy in values resulted from, you guessed it, obsolescence. 

The Indiana Board found in favor of Trimas and reduced the assessment to $2,960,000. The assessor appealed to the Tax Court. 

At the heart of the case was the selection of the comparable sales used to value the subject property. Trimas’s expert relied on sales of vacant manufacturing properties, whereas the assessor relied on sales of occupied, owner/user manufacturing facilities. Then came the testimony. Trimas’s expert testified that: 

Trimas’s property suffered from external obsolescence because a loss of manufacturing jobs and companies within Indiana during the relevant time period saturated the market with manufacturing facilities for sale; that market, however, lacked buyers. (See Cert. Admin. R. at 273-74, 305, 827-28.) As a result, the sales prices for these facilities were low, particularly when compared to their respective replacement costs (i.e., the amount it would cost to construct facilities with similar utility). That market trend, noted Mitchell, affected what Trimas’s property would itself garner on the market: “[w]hen there’s an oversupply and a lack of demand, to remain competitive, if your neighbor drops their price, you have to drop your price.” (Cert. Admin. R. at 828.) 

The assessor claimed that vacant properties are not comparable to occupied properties and that the claim of external obsolescence was “absurd” because the comps relied upon were vacant and the Trimas property was occupied.  

In it’s decision the Tax Court stated: 

the Assessor misunderstands the concept of market value-in-use on its most basic level. Generally speaking, market value-in-use, as determined by objectively verifiable market data, is the value of a property for its use, not the value of its use. 

And there you have it. The taxpayer’s team was able to convince the deciding bodies that obsolescence existed. The assessor’s arguments, obviously, didn’t go over so well.

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.

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).

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.

These days I find myself having a plethora of conversations with clients regarding the status of property tax appeals. Everyone wants reductions and refunds NOW! Although I can understand the urgency, it is also important to realize that pursuing property tax reductions can take time.

There are many things to consider when estimating the timeframe of a property tax appeal. Can appeals be resolved informally? Does the local/administrative board typically grant reasonable reductions? How big is the reduction being sought? What is the appeal volume/backlog in the jurisdiction? Is it likely that the case will go to court? Is there no chance of the case going to court? These are just a few of the myriad factors that are important to consider regarding the timeframe of an appeal.

I understand that, in the current economy, companies are attempting to achieve savings as fast as possible. However, speed should not be such a driving force that it negatively impacts the result of the appeal.

The Texas Legislature has enacted H.B. 3612, establishing a three year pilot program which allows taxpayers an alternative to appealing Appraisal Review Board determinations to district court. The program applies to properties with an appraised value of $1 million or more in Bexar, Cameron, Dallas, El Paso, Harris, Tarrant and Travis counties. The program is effective January 1, 2010.

In the recently decided case of Ace Hardware Corp. v. Little, the State of New York Supreme Court, Appellate Division agreed with the Supreme Court’s dismissal of the taxpayer’s petitions for failing to meet it’s burden by a preponderance of evidence. The trial court found the taxpayer’s appraisal inappropriate, in large part, due to the fact that the taxpayer’s appraiser utilized a “reconstruction cost approach” which was “not included in the treaties traditionally relied upon by real estate appraisers”. I was hoping there would be more details describing the “reconstruction” approach, but the decision does not offer an explanation.