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Appealing property taxes.

In the current climate of depressed commercial property values, owners and property managers may find a silver lining in the reduction of property tax liability. Today's lower values may very well provide the evidence necessary to perfect an appeal of a property's real estate taxes.

The following scenario describes the steps in a typical assessment appeal as it could occur in California. It is important to note that while the basics of any appeal assessment are the same, the deadlines and appeal processes differ significantly in each state.

A sample appeal

An owner of a high-rise office building in San Francisco received an assessment notice stating that his building had been valued at $250 per square foot. At the same time, he was aware that a similar high-rise in the next block had just been sold at $200 per square foot. The notice provided him with a specific deadline to file his appeal with the assessor's office or with the Assessment Appeals Board clerk.

At this point, the owner contacted a property tax consultant at his accounting firm to assist in preparing his appeal to the assessor.

The property tax consultant first outlined some general strategies. First, the owner was advised that an appeal is primarily a sales presentation; the owner making the appeal must "sell" his estimate of the building's true market value to the assessor.

The consultant also advised the owner to negotiate in good faith, asking only the reduction in the assessment that was truly justified. Remember, an owner probably has to deal with the assessor again in the future, so an unreasonable concession now could backfire later.

Finally, the property tax consultant warned the owner to respect the power of the assessor's office. The assessor can choose to force an appeal through every step of the system, expending a great deal of the owner's time and money. All negotiations and disputes should be kept on a professional level.

The consultant also recognized that the owner had certain advantages on his side, included an in-depth knowledge of his property and the surrounding market, and the time and resources to present his case.

Reviewing the asset

Keeping in mind that all assessments of market value are somewhat subjective and that every assessor is burdened with a tremendous case load, the owner and his property tax consultant knew they would have to do much of the assessor's work for him.

They secured copies of the assessor's records in advance and reviewed them in order to understand how the assessor derived his values. Most appraisals are based on "standard" market rents, which often do not reflect special lease deals, concessions, or rent abatements.

The assessor's appraisal records were loaded into a Lotus spreadsheet for easy comparison with financial data from the owner to identify conflicting statements.

The owner and his property tax consultant conducted a field trip to inspect the building, using a tape recorder and a video camera. Comparisons of physical conditions were made between the building and similar properties in the neighborhood. These were documented and noted for the appeal.

The consultant and the owner evaluated the strengths and weaknesses of the original appraisal. In this instance, the value had been based on lease rates which were set during an era of tight office supply in the marketplace. Since then, lease rates had dropped by as much as 20 percent. The consultant highlighted this area, as well as noting a higher-than-normal vacancy rate resulting from an increasing supply of office space.

Armed with this information, the owner and the property tax consultant began outlining their strategy. The pair outlined what would be the acceptable limits of resolution for the owner, recognizing that a compromise would probably be the result. They outlined alternative courses of action should the initial appeal process fail.

The owner and the property tax consultant continued to review their objections to the valuation, looking for new examples and more data to highlight the strengths of their arguments and for new approaches that would counter the case's weaknesses.

Just as rents may be overestimated, operating expenses, which are computed on present formulas, may be underestimated. Other errors that might justify appeal include an incorrect classification or incorrect use of property.

Making the appeal

The owner and the property tax consultant were now ready to discuss the property value with the assessor's office, and they scheduled meetings in advance with the proper personnel to resolve these issues. Efforts were made to schedule enough in advance to get administrative approval for any changes in the assessment or to leave enough time for revisions that might be needed before the final appeal date.

Appeals must usually be filed with the assessor by a specific deadline on proper forms and with required documentation. Exact procedures vary from state to state. It is advisable to hand-deliver all documentation for appeal and to insist on a receipt as proof that the paperwork was filed.

The consultant also prepared an agenda, or checklist, to make sure they covered all points of their case during the meeting. They brought documentation for the assessor in a format similar to the assessor's office appraisal form.

Appeal hearings are generally informal and do not require counsel or special consultants. However, it is important to follow the steps in the appeal process exactly.

During each meeting, the pair documented all their discussions with the assessor, including the date, the parties involved in each meeting, the location of the meeting, the property under discussion, the substance of the meeting, and the points of agreement and disagreement. The consultant advised that, should the initial appeal fail, these notes could be used at any later hearing to substantiate their claims, as well as prove their good faith in negotiations.

The attitude of the owner and his consultant during the meeting helped pave the way for a successful negotiation: never taking any of the discussion as a personal attack, acting professionally and knowledgeably, and listening carefully to the assessor's remarks.

Both the owner and the property tax consultant sought to educate the assessor about actual conditions at the property, not to attack his position. They pointed out inconsistencies in the assessor's valuation, particularly in assessments of projects similar in size and location to the owner's building.

The two were artful in trying to see the assessor's viewpoint. At the same time, the consultant evaluated whether or not the assessor was willing to reconsider his assumptions and reach an independent conclusion of value or whether he was simply sticking to the existing assessment.

At this point, the consultant moved to resolve the assessment. All of the assumptions used by the assessor or the consultant, including leases, vacancy rates, and cap rates, were reviewed and agreements were reached on narrower ranges for each based on the underlying data. These narrower ranges were then used in an income analysis to tighten the value range further to between $205 and $225 per square foot.

After consulting with the property owner, the consultant proposed a compromise settlement value of $215 per square foot, which was accepted by the assessor. The assessed value was thus reduced by $14 million, for a total savings of $150,000 in taxes.

Appealing the appeal

While the owner and his property tax consultant were successful in winning their appeal at this level, had they lost, the next step would have been a hearing with the Board of Equalization. Again, the proper procedure would have included careful and complete paperwork, including the appeal forms, an agency statement, and payment of any fees.

To prepare for the appeal, the owner and consultant might have conducted a mock hearing, role playing their own and their adversaries' parts in order to anticipate every facet of the case.

Careful attention again would be paid to the assessor's case to find specific weaknesses and inconsistencies to be questioned in cross-examination. Exhibits would be submitted to support the owner's case. A brief closing argument would be prepared to highlight once again the strengths of the case.

The attitude again would have been professional, with the stance that they were there as friends of the board, to explain their position and provide the board with all the data necessary for it to make an informed decision. The consultant's presentation would emphasize that the appeal, if accepted, would result in a more accurate assessed value.

If the appeal fails, many states offer judicial relief in a county superior court. At this point, hiring an attorney may be necessary.

Patrick Chambers is director of property tax consulting in the Los Angeles office of the Arthur Andersen Real Estate Services Group (RESG), which provides accounting and audit, tax, information systems, financial advisory, real estate counseling, and appraisal services. With more than 6,000 clients and 1,500 personnel, the RESG is one of the largest international real estate and hospitality accounting and consulting organizations.

How to Achieve an Equitable Assessment

A program to achieve assessment equity is largely a question of adopting an attitude and making a commitment to pay no more, no less, than an acceptable property value range requires in terms of tax dollars.

Once a commitment has been made to pursue assessment equity, then an overall plan, implementation strategy, and a time schedule can be developed to achieve the goal. An effective program should include the following:

Collect all pertinent facts on the subject property. These include size, capacity, improvements, age, use, condition, idle areas, and other physical characteristics.

Identify the basic components of the assessment equation and the tax burden: fair market value, assessment ratio or equalization rate, assessed value, tax rate, and tax burden.

Obtain or inspect assessment office records to establish the valuation methods and procedures applied by the assessor in developing value:

* Reproduction or replacement cost

* Depreciation allowance

* Obsolescence allowances

* Fair market value

* Date of last revaluation

* Mass appraisal methods and their inherent weaknesses

Develop rules of thumb or valuation indicators for making comparisons with the assessor's value:

* The organization, development, and maintenance of in-house resources for use in monitoring assessment values

* Knowledge about asset values from experience in constructing, buying, selling, renting, or developing property

* Valuation criteria from appraisals, consultants, sales data banks

* Entrepreneurs' approach used in investment decisions

Establish valuation parameters, considering the cost approach, the income approach, and the market approach.

Establish a realistic valuation range as the assessment goal.

Establish a realistic time schedule to achieve the goal. Since most major inequities develop over time, they will require time to cure. The time schedule will be influenced by:

* Extent of the inequity

* The assessment goal

* The taxpayer's status on tax rolls

* The budgetary impact of relief

* Economic trends of the area

* Company policy

Develop an attitude:

* Enlist ownership support

* Establish a corporate posture on litigation

* Pursue a negotiated settlement

* Be willing to compromise

* Pay no more and no less than a fair share

Examine local attitudes in past assessment challenges, from the assessor, elected officials, a hearing forum, and mass media reporting--a spirit of cooperation or one of "let the court decide."

Know the appeal procedures and time requirements:

* Preliminary discussions with assessor

* Exchange of information with assessor

* Negotiations with assessor

* Appeal to local board of review

* Appeal to state board of review

* Appeal to courts

Michael Remsha, P.E., ASA, is a valuation expert with the American Appraisal Association, Chicago.

Tips for Tax Appeals

As a professional property manager, I am often responsible for monitoring, paying, and appealing property taxes. Most assessor's offices are trained to use either replacement cost or market value as the basis for assessing property and are less comfortable with the income approach to valuation.

Yet, in a market with declining sales and falling NOIs, an appeal based on income-to-value ratios is usually the most effective.

* The current operating statement, which is the single most important piece of information in supporting challenges of income and expenses.

* Rent rolls and information on vacancies and concessions, which are essential for establishing gross income.

* Third-party data supporting the validity of operating expenses and income. The IREM Income/Expense Analysis reports will demonstrate that operating figures and rental rates for the property are representative for the area. Such data will also allow for a comparison of tax rates assessed for the building with the local area and with national averages.

* Photographs of the building and of competing buildings to show the physical factors affecting value.

* Assessments or sale prices of competing buildings for comparison.

Provide only the factors the assessor can use. Information on amortization, debt service, or capitalized items are not applicable.

In addition to having all the pertinent information, a few tips on improving your appeal chances include:

* Start early. In most states, a late request will not be accepted.

* Make a personal visit early in the year, and determine what the forms and filing dates are for adjustments.

* Be honest about your projected costs.

* Be polite.

* Be prepared and have information in a form the appraiser understands.

* Be personal. If possible, plead your case yourself.

Rod Noles, CPM|R~, CCIM, CRE, GRI, is president of Noles-Woodring Realty in Alexandria, Louisiana. He has served as a part-time member of the Louisiana Tax Commission and acts as a consultant on ad valorem tax appeals.
COPYRIGHT 1993 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related articles
Author:Chambers, Patrick; Remsha, Michael; Noles, Rod
Publication:Journal of Property Management
Date:Mar 1, 1993
Previous Article:Lightening the costs of lighting.
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