Challenging the Tax Man

For property tax purposes, the huge capital investment made in large single-tenant, corporate campuses and headquarters buildings 1 million sq. ft. or more is often meaningless. Case in point: In a recent lawsuit challenging an assessor's appraisal of a 4.3 million sq. ft. property, the owner succeeded in obtaining a tax value equal to approximately 15% of the facility's original cost. In fact, the original cost and replacement costs of the entire facility were ignored as irrelevant to market value. The owner won this settlement because the following six key issues were applied in the appraisal and in critiquing the tax authorities' determination of market value:

  1. National Market

    The number of potential buyers for large corporate headquarters is relatively small, as are the number of comparable properties and sales. Thus, the market for these properties is usually national in scope. Consequently, local tax authorities do not have appropriate market data to adequately appraise these properties. It is the quantity and quality of information concerning sales of similar properties that affect the efficacy of appraisals. Thus, local assessors' conclusions about value are inevitably unfair. Accordingly, owners should hire appraisers who are familiar with the national market and who have the data to support their appraisals.

  2. Discount to Shell

    Often, buyers desiring a large corporate headquarters purchase an existing facility that can be remodeled to meet their needs. These buyers are unwilling to pay for the former owner's finish-out. They are buying the facility based primarily on the land value plus shell cost. Be sure your appraiser and the tax authorities understand and appreciate this unique characteristic of this market.

  3. Exit Strategy

    The current trend is to design a corporate headquarters as a cluster of standard office buildings, each capable of independent use and designed for multi-tenant use. Ultimately the buildings and land sites are configured in a way that allow the exit strategy of converting the facility into an office park of several multi-tenant buildings. Existing facilities that do not have this design characteristic are subject to an additional discount. Even if a prospective buyer is willing to invest in substantial remodeling to meet its individual needs, the existing facility may be impossible to reconstruct in order to provide an adequate exit strategy. If that is the case, an additional discount is required to offset the inadequacy. This means a lower market value that the tax authorities must take into account.

  4. Impact of 9/11

    The threat of terrorism in large downtown high-rise office buildings may affect the market for corporate campuses. Corporations seeking security in the aftermath of 9/11 may consider decentralization as a primary goal. The desire to spread facilities, activities and employees over numerous locations to avoid the impact of another terrorist attack may reduce demand for large headquarters properties. This reduced demand naturally results in lower market values. Make sure the tax authorities understand this value destroying issue.

  5. Relocation Expense

    For large corporate headquarters, a business consideration that affects market value is relocation expense. For example, if a property is located where there are limited potential local buyers, the property will be competing with other corporate facilities that are closer to the potential buyer's location. This will require the owner to offer an additional incentive to offset the increased expense of the buyer relocating its workforce, which translates into a lower asking price and a lower market value. Make sure relocation expense is taken into consideration.

  6. Using the Correct Approach to Value

    For large, corporate headquarters you should understand that the sales comparison approach is the preferred method when there are sufficient comparable sales to conduct the analysis. Using the cost approach is difficult due to the large amount of functional and economic obsolescence that must be quantified. The income approach also is difficult to apply because these properties are not created with rental income in mind.

The sizeable capital investments made in large corporate headquarters properties are not necessarily representative of market value. Therefore, a tax authority's reliance on original cost or replacement cost is not only unfair, it is just plain wrong.

William Ikard is a partner in the Austin, Texas, law firm of Popp & Ikard, the Texas affiliate of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.

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