Identifying Assessor Errors in Property Valuations

— by Gilbert D. Davila, Esq., Apartment Finance Today May 2005

Assessors often attempt to create an impression that a clinical evaluation of market information produces an objective taxable value based on a process that is scientific, impartial and precise. Although real estate valuation does employ scientific techniques, in reality, assessors often create assumptions about a specific property or property types which lead to errors in property tax assessments. Thus, it is imperative that apartment owners make themselves aware of the assessor’s mistakes in valuing their properties if they wish to be successful in protesting their ever-increasing property valuations.

Errors in Basic Data
A review of the basic data contained in the taxing authority’s property records offers the first and perhaps the easiest place to find assessment errors. Assessor’s records commonly contain errors in a property’s age, total square footage, net leaseable area, number of units, unit mix and facility amenities. An error in one of these fundamental property characteristics can significantly increase a property’s overall assessment.

Many jurisdictions provide taxpayers specific protest avenues to correct these common mistakes. Apartment owners should be prepared to share a current rent roll with their assessor in order to document the property’s square footage, net leaseable area, number of units and unit mix. It may also be helpful to provide the assessor with copies of the property’s most recent marketing materials, which show the project’s different floor plans and amenities.

Failure to Consider a Property’s Actual Performance
Another common error made by assessors is failure to take into consideration the property’s actual economic performance when they derive a market assessment. Multi-family owners typically evaluate market value based on the actual cash flow generated by the property, while assessors use “market” derived rent and vacancy figures to arrive at their valuations. Thus, owners should provide the assessor with the current and prior year’s operating statements, if the numbers support a value reduction.

A detailed discussion of specific income and expense items can distinguish a property from other “market” comparables and show trends in rental rates, occupancy and expenses. For example, assessors often respond quickly to higher rental rates but move very slowly to acknowledge the offsetting increases in expenses. Over the last few years owners have seen operating cost rise sharply and they now need to clearly and forcefully present these increases to the assessor.

Owners should demonstrate that “make-ready” costs are necessary to support the income stream of the property and that they should be considered as valid expenses even if carried as “below the line” costs on the property’s income statement. For older apartments, owners must inform the assessor about the cost to remodel or renovate their projects, since these are necessary to stay competitive with newer developments. Assessors generally fail to acknowledge the extent of capital repairs and renovations that aging buildings require.

Finally, owners have no choice but to present assessing authorities with occupancy reports to portray the property’s occupancy trends, compare the property’s occupancy levels with market comparables and outline concessions and allowances given to maintain occupancy.

Misconceptions about Purchase Price and Comparable Sales
Perhaps the most common mistake made by assessors is tying a property’s real estate value to its purchase or sale price. The conflict between the real world of what an owner pays for a property and the hypothetical world of property tax assessments becomes a constant source of tension. An apartment owner should not avoid a tax appeal simply because the recent purchase price of their complex was higher than the taxable value of the property. Owners pay for properties based on their analysis of factors beyond real estate. As a result, a purchase price should provide no more than a touchstone for an assessor. Apartment owners arguing against a purchase price as the basis for value should outline for the assessor the factors that were considered in purchasing the property, such as special financing considerations and how the actual performance of the property differs from projections made at the time of purchase.

Assessors are notorious for focusing on high sales prices of “comparable” properties to support their aggressive assessments. Often, these properties are not comparable to the owner’s complex. Thus, owners can argue the physical and economic differences between the comparable sales and his apartment project. More specifically, the owner should point out to the assessor that neither an analysis of public records nor interviews with buyers and sellers can reveal all the factors that influenced a buyer’s decision to purchase a property. For example, a sale price might include a significant amount of business personal property or below market financing that would have to be known to the assessor in order to identify a truly “comparable” sale. Apartment owners must make sure that assessors are comparing apples to apples.

Lack of Equality and Uniformity
Many states require that assessments among comparable properties be equal and uniform. The problem for apartment owners revolves around the fact that assessors often value their properties without considering the assessment of like properties. A multi-family owner’s assessment should fall within a uniform range of values when compared to other comparable properties. Even if the assessor has been fair and taken into account the recent softness in the market for a specific owner’s project, it is possible that the owner’s competitors may have been given a better break. Apartment owners should compare their property’s assessment to other comparable properties on a square footage and per unit basis, with the owner’s market survey usually being a good place to begin. If an owner’s property is assessed disproportionately higher than the comparable properties, an argument can be made for a value reduction based on equality and uniformity regardless of the assessor’s “market value” claims.

The key to an owner’s successful protest of valuation lies in educating the assessor about the operating environment of a property and at the same time educating themselves regarding the common errors assessors make in determining apartment values.

Gilbert Davila is a partner with the Austin, Texas law firm of Popp Gray & Hutcheson, PLLC. Popp Gray & Hutcheson devotes its practice to the representation of taxpayers in property tax matters and is the Texas member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Mr. Davila can be reached at: