Magazine article Journal of Property Management

True Value: The Case for Analyzing and Appealing Real Estate Taxes

Magazine article Journal of Property Management

True Value: The Case for Analyzing and Appealing Real Estate Taxes

Article excerpt

With the increasing disconnect and seeming dichotomy between market fundamentals and capitalization rates, real estate owners are not only pressing revenue streams but also scrutinizing operating expenses to maximize profitability. Because real estate taxes are generally one of the largest operating expenses for most properties, owners should focus on reducing tax assessments. Additionally, as many states and jurisdictions face fiscal crises and use property taxes to balance their budgets, owners should analyze their assessments annually and be wary of overvaluation.

"A revaluation can cause significant problems in today's environment," said Jeffrey Mandler, a partner in the law firm Berman, Rennert, Vogel & Mandler, P.A. "Despite the active sales climate in many locations, apartment fundamentals may actually be weak because of increasing vacancies and escalating costs. A jump in taxes could represent a significant blow to profitability and debt service coverage. When property taxes are increased, both the owner and lender must carefully examine the assessment and determine whether there are grounds to contest the higher taxes."


Although most owners of real estate, including equity syndicators, REITs and private investors, have sophisticated internal valuation processes, the lack of a national taxing standard precludes owners from unilaterally developing a portfolio-wide tax appeal strategy. Instead, owners must individually develop property- and segment-specific approaches. Jurisdiction appraisers, too, have become increasingly more sophisticated due mainly to improved information flows and new disclosure laws, and use a number of different valuation methods to assess property. In some jurisdictions, property owners are required to submit annual detailed income and expense reports with a list of current vacancies. (1) Accordingly, assessors can use this information not only to value property but defend assessments. In Texas, the legislature just passed a bill that will make Texas a property sale disclosure state.

Clearly, the assessor's first goal in determining fee-simple tax value is establishing the highest and best use for the target property. This is functionally defined as the best legal use that would most likely result in the highest sale price. Ultimately, this may result in the property being classified with a special purpose or use. The assessor then approaches value in one or all of three ways. First, comparable market sales of like-kind properties are used to establish value. When like-kind properties with similar physical characteristics are hard to find, assessors are forced to use the cost approach, in which the property is valued at the actual cost, in today's dollars, to build the existing improvements on the land. (2) This will generally be higher than a realistic market valuation. Last, assessors also use a lease-fee income approach, derived by capitalizing the income of a property, less operating expenses and market vacancy.


Owners should annually review whether a property is valued equitably against other competitive properties. Realize that with the multitude of properties to assess and inherent idiosyncrasies within the market, assessors can make mistakes. It helps to have a thorough understanding of a property's physical condition and amenities versus the rest of the market segment. Outdated information can lead to an incorrect property classification.

"When older apartments are involved, show what it will cost you to remodel or renovate to stay competitive with newer developments. Taxing jurisdictions generally do not want to acknowledge the extent of the capital repairs and renovations that aging buildings need. These ongoing expenses should be included in an annual expense statement and submitted to the property appraiser," Mandler said.

Also, consider whether the property is impaired, functionally obsolete or if there are environmental concerns that limit the property's ability to compete in the market. …

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