Making Property Taxes Work

By:  Cynthia Hoffman as published in Real Estate Forum, September 1999

Executive Forum Panelists:

Moderator:  Synthia J. Hoffman, Managing Editor, Real Estate Forum
David J. Chitlik, Director/lodging, sales and property tax, Marriott Lodging, Washington, DC
Stanley J. Fineman, Attorney/partner, Wilkes, Artis, Hedrick & Lane, Washington, DC
Martin S. Katz, President, American Property Tax Counsel, Partner, Fisk Kart and Katz, Ltd., Chicago
James Popp, Attorney, Popp & Ikard, LLP, Austin, TX
Lawrence F. Stephan, Managing Director/controller, Kennedy-Wilson Properties, Ltd., Chicago

The American Property Tax Counsel, a national affiliation of property tax attorneys, was formed approximately six years ago with the mission of providing local tax-reduction expertise to owners of multi-state portfolios. Its 28 member firms, which are scattered across the US and Canada, undergo a rigorous entry process that reviews such criteria as years of experience in tax appeals, complexity of cases tried and articles written on property tax issues.  The APTC also sponsors annual seminars on a variety of topics pertinent to the property tax field and offers a data base detailing compliance, budgeting, tax projections, assessment information and appeal status on properties.

Recently, a panel of APTC members met in Chicago with Real Estate Forum managing editor Cynthia J. Hoffman to discuss a range of pertinent topics.  What follows is an edited version of their comments.

Cynthia J. Hoffman:  In the world of taxation, why do property taxes stand out as especially vague?
Martin S. Katz:  The uniqueness of property taxes is related to the fact that they vary dramatically from state to state and, in many cases, from jurisdiction to jurisdiction within the same state.  And it's also unique in that it's the only tax that is geared in almost all states to the subjective concept of fair market value; and it's one that can be dramatically affected by convincing evidentiary arguments base on either appraisal theory or constitutional arguments leading to the conclusion that the assessment and corresponding taxes on a particular piece of property are excessive.
David J. Chitlik:  From the hotel development side, and it's probably true for office buildings too, they can make or break a development or deal, depending on what the projected property taxes are going to be and what can be done about them.
James Popp:  The subjective nature of property tax makes it much different than other taxes, such as sales tax or franchise taxes, which are based upon a formula.  Being subjective brings into play a whole series of opinions.  first, you start with the opinion of the tax authorities.  Then you go to an administrative review, which again is totally subjective, where the property owner and the tax assessor each put in evidence that is based upon their personal opinion.  Then you go to the trial court where each of the sides puts forth their opinion.  And the result is the evidence presented at each level becomes more dependent upon the presentation that's made and a knowledge of the law rather than on a particular formula used.
Stanley J. Fineman: Income taxes are determined by a formula:  "How much did you earn this year, and send it to me."  But with property taxes, the value is in the eyes of the beholder.  So we behold with different eyes than the assessor.  And it is a never-ending battle, with more sophisticated techniques being used.
Lawrence F. Stephan:  The unique thing about real estate taxes is that they are not consistent anywhere.  Every jurisdiction has different valuation techniques.  Easily the most challenging aspect of the whole tax bill process is trying to determine who should represent me;  how do we approach this battle; and what kind of presentation makes the most sense.  You can't rely upon one method working everywhere.

Hoffman:  How can a comprehensive approach to property taxes provide significant dollar increases in portfolio asset value?
Chitlik: We have a general rule of thumb, at least for Marriott Hotels, of a 10-to-1 ratio.  Every dollar on the net income bottom line translates to $10 in value.  So every dollar of property taxes saved gives you an extra $10 in value.
Katz: The appraisal and valuation of real estate is an art, not a science.  And many appraisers and assessors valuing real estate look at it too much as a science.  It's more of an art today than it was 20-plus years ago because of all of the changes that have occurred in the industry, the cycles, the different motivations of buyers and sellers and availability of capital at particular points in time.

Hoffman:  If that's the case, it would be very hard to standardize.
Katz:  The world of real estate is constantly changing.  And to come up with standards that are hard and fast wouldn't be correct.  It might be feasible, but I don't think it would be a correct approach for valuation for property tax purposes because this is a constantly changing area.  And so to have hard-and-fast rules and standards that you apply across the board doesn't work.
Chitlik: The standards we're talking about are the standards of professional expertise, perhaps even conduct.  They should look at reproduction costs.  They should look at sales.  Once they gather this information, then they can use creativity and art.  Regardless of whether it's an art or a formula, if you don't get the right foundation, if you don't do the right research, then you can't come up with an appropriate conclusion whether you do it with a formula or some art form.  So the standards are the criteria to get to the point where you are able to make your conclusions.

Hoffman:  Are some states notorious for being particularly hard to deal with?  Are some known to be more favorable?
Popp:  Texas is probably an example of going from bad to very good.  Twenty years ago, Texas was probably one of the more difficult states to deal with.  They had more than 2,500 taxing units, each putting a separate value on the property.  And you had to prove that the value was such that it shocked the conscience.  We passed a new property tax code in the early '80s that allowed a preponderance of the evidence, allowed trial de novo in district court where whoever puts on the best evidence usually wins and is allowed attorneys' fees for prevailing taxpayers.  So Texas went from being one of the worst states to being one of the best pro-taxpayer states at the property tax level.
Fineman: The standard of proof differs from jurisdiction to jurisdiction, so in Virginia it's manifest error.  Until very recently, in Illinois it was constructive fraud.  And they've changed that a bit.  In the District of Columbia, it is a preponderance of the evidence.  So, if what we argue sounds more reasonable than what the assessor does, we win.  Whereas if we presented the same case in Illinois, we would lose because the standard of proof is different.
There is another component to determine taxes.  You have the assessment, which is what we've been talking about.  But you also have the tax rate, and the tax rate varies dramatically from place to place.  So the property tax burden can be five to six times greater in one jurisdiction than in another.

Hoffman:  Which goes back to what you said earlier about how property taxes can make or break a deal.
Chitlik:  Very much so.  If you have a low tax rate, even if the assessment or value is out of line, it may not be worth your while to fight it.  You take that same situation in another state, and you're in court until the end of the year fighting to the that same value reduced.
Fineman: We've been talking primarily about market value.  But there's something that overlays that concept, and it's a constitutional concept called uniformity or equalization.  If a property is taxed at its market value but the owner of that property is paying more than an identical property next to it, there's something wrong.  Now, how do you square those two?  The Supreme Court came down with a decision back in 1923 that said if you have to select between fair market value and uniformity of treatment, uniformity of treatment prevails because everybody that has like properties should be treated in the same fashion by the taxing authority.  So sometimes when we're looking at appeals, we examine it not just from the standpoint of market value, but we also say, "If we can find a like property, how is that one being assessed?"  And if it's significantly different, we have an argument.

Hoffman:  What factors do you use in determining if the taxes on a certain property are appropriate?
Chitlik: In many cases it's cost benefit.  It's not just that the property is overvalued, but how much will it cost me if I pursue it.  And it depends on the jurisdiction.
Stephan: We do a semi-annual review of all taxes on all properties.  And we'll get together with an ownership rep or the owner himself.  We also call in a portfolio manager, a property manager and a leasing manager.  Then we'll get the attorney or tax advisor involved.  The leasing manager will talk to us about the marketing efforts and what's going on in the market.  Are properties vacant?  Are they fully occupied?  What kind of rates can we expect?  Then the property manager will talk about that specific building.  He'll tell us what the vacancy rates are, if there was a flood and X number of floors are damaged.  After that, we'll get the tax advisor or the attorney to give us his view.  And then the owner makes the final decision as to whether or not he thinks we're in a position where we should file an appeal.
Popp: What factors go into your cost-benefit analysis?
Chitlik:  In many cases it's the total tax, which is the rate and the value, and how difficult it is to overturn it.  So if I'm in a low-tax jurisdiction in Virginia with a manifest error, it's a different criteria than in Minnesota or Boston or Texas.  But the other part is whether or not it's long-term.  Is it an assessment cycle where you fight it once, and then it stays the same for the next four rears or two years?  So how long does the benefit extend, or is it something that you're going to have to fight year after year?
Stephan:  Our first criterion is always to make sure you get a lower assessment.  We don't look at the costs involved until we're able to determine that.  You draw upon your resources and try to determine which firm, which advisor, which person is going to do the best job for a particular property in lowering that assessment.  Once you've determined who that's going to be, then you have some ability to negotiate a fee with a particular advisor because there are some cases where you go in and you've got a slam-dunk.  All you have to do is show up and you're going to get a valuation reduction.  And that's because of variables in the market.

Hoffman:  When acquiring property, how should future property taxes be projected?
Chitlik:  A big sale price is not necessarily going to translate into a big assessment.  It may influence it, but your not going to see an assessor necessarily pegging a sale price.  So you have to look at what other comparable assessments are.
Katz: One other aspect is timing.  And that can be crucial depending upon the jurisdiction you're in because you may be in an area that has a four-year cycle versus an annual reassessment cycle.  The reason that is critical in terms of projecting taxes is the timing of your acquisition.  If you're acquiring the property and you're going to record a sale price six months before the assessor is re-assessing for the next three- or four-year period, it will have potentially more of an immediate impact on you than if you were acquiring it two months after they've already made the assessment and they're not going to re-value the property again for three or four years.  We've advised clients to delay buys because of the timing.
Fineman: There are ways to project taxes, but if you have a mass of comparable properties, you can pretty much get a range of per-unit of value, whether it's per room for a hotel or per sf for office buildings.  But once you go out two or three years, the crystal ball gets very cloudy because tax rates can change.