Simple Steps to Property Tax Reductions

— By Gilbert D. Davila, Esq., as published by Apartment Finance Today, February, 2008

Property tax expense can have a huge impact on a multi-family project’s bottom line. Thus, developers and owners must constantly monitor their property tax valuations in order to make a decision about whether to appeal the assessment. Once the valuation is appealed, the owner must decide how to combat the excessive valuation. An overview of the common mistakes made by assessors can help multi-family owners develop arguements for lower tax assessments.

Should I Appeal My Assessment?

In most jurisdictions, the assessor’s maintain a statutory responsibility to value a property at its “market value” as of a particular valuation date. A multi-family owner should most definitely appeal an assessment if the assessor’s value exceeds the owner’s estimate of the property’s market value. The following factors should be considered before making a decision to appeal: 1. Procedural and valuation laws vary from state to state. Therefore, owners should discuss the procedures for appeal and the possibility of success with a tax specialist in the state where the property is located; 2. The costs associated with an appeal and the potential tax savings from such an appeal should be evaluated to ensure that the protest makes economic sense. 3. The practical aspects of the appeal must be considered, such as the time and resources required for the appeal and the documents needed to make an effective case to the assessor.

After working through these three issues, most multi-family owners find it worthwhile to proceed with an assessment appeal. Once the appeal decision has been made, the next step calls for organizing the valuation arguments and gathering the documents which support the property owner’s opinion of value. Most often, a successful assessment appeal is based on outlining and attacking errors made by the assessor in the valuation process.

Is My Property Data Correct?

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 the property’s basic data can significantly increase a property’s overall assessment (see an example in the sidebar).

How Simple Errors Cost Taxpayers Big Money

For example, an assessor’s records indicate a project’s net leaseable area as 175,000 sf. and the project has been valued at $45/sf, which equates to a total assessment of $7,875,000. In reality, the project only contains 160,000 sf., and, thus, should be valued at $7,200,000. This one error alone results in a significant $675,000 over assessment. Were the owner to find a second mistake in the records, such as the valuation of a $150,000 swimming pool that did not exist at the property, the excessive valuation based on errors in basic data would be even more egregious. The two recording errors in this scenario would amount to $825,000 in excessive valuation, or more than 10% of the initial valuation. A simple review of the assessor’s records in this example would have netted the owner almost $25,000 in tax savings in a jurisdiction with a $3.00 mill rate for every $100 of value.

Providing a current rent roll to the assessor can help correct mistakes in a property’s square footage, net leaseable area, number of units and unit mix. An owner may also wish to produce a site plan for the property along with the most recent marketing materials which show the project’s different floor plans and amenities. Correcting basic errors in the assessor’s records remains the simplest path to lower a tax assessment.

How Did the Assessor Arrive at My Valuation?

Assessors will commonly derive a market value using one or more of the three classic approaches to value: cost, income or sales comparison. The cost approach is arguably the least reliable approach to value if the property is more than several years old, especially given the difficulties of estimating depreciation and obsolescence factors for older properties. An assessor will most likely rely on an income and/or sales comparison approach when determining an apartment’s valuation. Value reductions can be gained by disputing how the assessor has applied a valuation methodology to a specific property.

How Did the Assessor Apply the Income Approach to Valuation?

In an income approach, assessors typically use market driven rent, vacancy and expense factors to arrive at a net operating income figure that is then capitalized using a market capitalization rate. Conversely, multi-family owners typically estimate market value based on the actual cash flow generated by the property. The differences between actual cash flows and market factors can often support a value reduction. Thus, owners should challenge the market factors used by the assessor and support the challenge with data taken directly from the property’s current and previous year’s operating statements, if such data is in the property owner’s favor. Often, the market factors used in the assessor’s income approach rely on data taken from properties that are not truly comparable to the property being assessed. A property’s operating statement can help distinguish the owner’s property from “comparable” properties that lead to higher assessments. Pointing out specific income and expense items can show trends in rental rates, occupancy and expenses that differ from the market trends alleged by the assessor.

Many times in an income approach the assessor will understate the allowance for vacancy and for concessions provided to tenants. Owners can present assessing authorities with rent rolls and monthly 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.

Finally, assessors often apply artificially low capitalization rates to net operating income in order to support a higher valuation. The capitalization rates are usually derived from sales of comparable properties that are either not truly comparable or have unique characteristics that do not qualify the sales as true market transactions. Apartment owners should push the assessor to provide the data that supports the capitalization rates being used and, thus, distinguish the comparable sales as not truly comparable.

How Did the Assessor Apply the Sales Comparison Approach to Valuation?

Aggressive assessments often result from the assessor’s reliance on the recent sales prices of comparable properties. A property owner can usually discredit “comparable” sales by outlining the physical and economic differences between the properties sold and the assessed property. More specifically, the owner can point out to the assessor that the factors influencing a buyer’s decision to purchase a property cannot be known unless the assessor was a party to the transaction. For example, a purchaser may have obtained below market financing or might have been motivated by time constraints or income tax consequences when acquiring the comparable property. The assessor cannot categorize a sale as comparable unless ALL the purchasing factors are known. Apartment owners must make sure that assessors understand the meaning of comparability.

A common mistake made by assessors is assuming that a purchase price equals market value. 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. Taxpayers 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.

Did the Assessor Consider Equality and Uniformity in His Valuation?

Most taxing jurisdictions require that assessments among comparable properties be equal and uniform. The fact that assessors often value apartment projects without considering the assessment of like properties presents an additional opportunity for owners to argue for a reduced assessment.

A taxpayer’s assessment should fall within a uniform range of values when compared to other comparable properties. 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 decision to appeal a project’s property tax assessment can lead to significant value reductions when owners evaluate the mistakes made by assessors in the valuation process and become proactive in showing the assessors the error of their ways.

Gilbert Davila is a partner with the Austin, Texas law firm of Popp Gray & Hutcheson, PLLC. The firm 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: