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.

Well, my alerts started pouring in yesterday from Twitter and email regarding the Georgia Senate’s unanimous approval of S.B. 346. The bill is being touted as major reform to the state’s property tax system. The summary of the bill on the General Assembly’s website states:

“A BILL to be entitled an Act to amend Title 48 of the Official Code of Georgia Annotated, relating to revenue and taxation, so as to revise comprehensively provisions regarding ad valorem taxes; to change certain provisions regarding ad valorem tax returns of taxpayers; to require annual notice regardless of changes; to provide for uniform notice forms and uniform appeal forms; to provide for powers, duties, and responsibilities of the state revenue commissioner; to provide for powers, duties, and responsibilities of the Department of Revenue regarding training of certain local tax officials and staff;to provide for an effective date; to repeal conflicting laws; and for other purposes.”

Most of the news points to the portions of the bill that call for extending the deadline to file an appeal to 45 days, instead of the current 30 days and the requirement for counties to issue annual valuation notices. Maybe it’s just me, but I do not find either of these changes to be extraordinary or innovative. I certainly wouldn’t consider them comprehensive reform.

The two portions of the bill that I do find interesting are the sections dealing with changes to appeal arbitration and what information the assessor’s must consider when arriving at their valuations.

Binding Arbitration:

Georgia previously allowed for a taxpayer to elect arbitration, but this bill significantly changes the mechanics of arbitration. The most notable changes are that the arbitration is now binding, the taxpayer is now required to submit an appraisal within 45 days of the assessor’s response to the appeal, and there will now be a single arbitrator, either agreed upon by the taxpayer and county or appointed by a judge.

Distressed Sales:

The bill introduces new language regarding the information the assessor’s must consider when arriving at their valuation. The new language states:

“(.1) ‘Arm’s length, bona fide sale’ means a transaction carried out by unrelated or unaffiliated parties, as by a willing buyer and a willing seller, each acting in his or her own self-interest, including a bona fide distress sale or sale at public auction.”

“(2.1) ‘Distress sale’ means a transaction which has occurred in good faith without fraud or deceit and includes, but is not limited to, a foreclosure, short sale, or bank sale.”

If the bill passes the House it will be interesting to see how this will work in reality.

Overall, in my opinion, this bill constitutes tweaks far more than reform.

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.

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.