Many property owners are paying more than they should for property taxes, because their property is overvalued by local tax assessors. These owners now can find tax relief by creating their own appraisal team.
Plummeting real estate values in the early-1990s affected the sale price for many properties, but one place where they have been slower to register is the tax assessor's office. Some tax jurisdictions assess property values only every seven, eight or 10 years, meaning short-term changes in the market, the particular business or the property itself aren't necessarily reflected in its current assessed value.
Many property owners are paying higher taxes, but that doesn't have to be the case. Appraisal firms and tax consultants are increasingly providing independent appraisals of properties solely for tax purposes. If they find evidence of an over-valued assessment, they negotiate readjustments with the municipalities involved.
If a negotiated settlement cannot be reached, then an appeal is filed, and it can be settled in the courts. Either way, the process begins with a re-evaluation of the property.
"It is not a full appraisal like we would conduct for other purposes," says Keith M. Kramer, president of Keith M. Kramer Associates which is based in Chesterfield, Mo." Instead, we highlight areas where the assessors may have missed a few things."
These "things" are negatives about the property that could be used in the negotiating process to justify a decrease in the value.
"From our standpoint, bad is good in that it can help lower the taxes," says Bob Henderson, vice president of marketing for Dallas-based Real Estate Tax Services.
For a property owner looking for this kind of tax relief, a good appraiser is only half the team. They also need an experienced tax consultant to negotiate the readjustment with the assessor's office.
An analogy would be the appraiser as a detective looking for the evidence, and the tax consultant as the prosecuting attorney using the evidence to bring about justice, which in this case is a more accurate assessment.
However, as in a criminal court case, "your negotiating position is only as good as your information," says Joe Dondiego, managing director of New York-based Cushman & Wakefield's tax consulting service, a new division of the company that branched out to meet the client demand for tax help.
"(Appraisers) prepare the ammunition and let someone else negotiate," says Donald M. Blake Jr., corporate vice president of Joseph J. Blake & Associates based in New York. "We are not in the business of negotiating, so it is better to have someone that handles negotiations as a full-time job. It is a team approach that our clients like."
"Factual errors are one thing, but many parts of the assessment are just a matter of judgment which can entail a lot of gray areas. In this case, it is just a matter of convincing the assessor," says Dondiego.
Depending on the type of property involved, factual errors can include: environmental problems like asbestos or ground water contamination, a decline in the surrounding neighborhood, increased competition for the market's business, a decline in a nationwide industry, the closing of a major employer in the area or an unusually large increase in business expenses.
Joyce Greenwood, senior vice president of Easley, McCaleb & Associates, a tax consulting firm which is based in Atlanta, says most assessors do a good job, but because of the large volume of assessments they conduct, mistakes, both factual and in judgment, are made. "Assessors are mass appraisers; they have a set of benchmark rules that they create from very general numbers," she explains. "We provide the assessor with more specific information on our clients, properties. It improves their benchmark and allows them to more clearly understand our clients, position."
"The assessors use a set of standards that apply 90% of the time," says Kramer of Keith M. Kramer & Associates. "But it is that other 10% where we can make a big difference."
Discrepancies in assessed value tend to grow in relation to the length of time since the last assessment. "Obviously, the longer the period since the last reassessment, the more time things have had to change," says Greenwood. "And the longer it has been, the more impact we can have on taxes. In general, we can save our clients anywhere from 10% to 20%."
One reason tax consultants are ambiguous about the potential savings they can provide to their clients is because each state and tax jurisdiction uses varying frequencies of assessments and methods.
Some cities and counties assess property every year, some every other year and others can wait as long as five or 10 years. In California, Proposition 13 provides that a property is only reassessed when it changes hands. Because of these variations, savings are very area-specific.
The method of valuation used is also critical to checking the accuracy of the assessment. There are basically three types of valuation: income, market and cost.
The income approach is the most common and has two variations. The first variation is lease fee in which contract rents and overall financial structure of the property is used to determine value. The second and most used variation is fee simple which takes into account anticipated future cash flows, such as rents, expenses and occupancy.
Market valuation uses sale prices of comparable properties to set values. This is popular and easy to support in states with full disclosure laws. The cost valuation method, on the other hand, takes into account the current replacement cost of the property, minus depreciation.
One controversial area in the tax assessment arena is the "intangible value," which is sometimes called the "business value," of a property and its actual real estate value.
This may be best explained using the example of a hotel. As a piece of real estate, owners feel that the property should be assessed by the value of the bricks and mortar from which it is built. However, the hotel is also a business concern, and if managed successfully, it will be profitable. This will add to the potential market value of the property in direct relation to how much profit is being realized.
Assessors take this profit potential into consideration when judging the value of a property. Many owners, appraisers and tax consultants disagree with this additional value, either completely or to some degree. "It is certainly an issue," says Dondiego of Cushman & Wakefield, " because by law, the assessor is only supposed to value the real estate."
Others do not object to business, or intangible, value being added to the assessment, but they feel it is being overestimated. "Assessors can put an intangible value on a property, because whether a hotel or other business is losing or making money affects its market price," says Richard A. Hause, senior vice president of Marshall & Stevens Inc.'s tax consulting service based in Philadelphia. "But sometimes these factors are included to excess."
"This is going to be a fundamental issue over the next few years," says Henderson of Real Estate Tax Services. "The problem right now is that, as a general rule, business value and real estate value have not been clearly defined or differentiated."
Court cases have brought up the issue, but no clear-cut decision has yet been rendered. However, the issue has already become a negotiating point with some tax consultants, though not always a successful one.
"It is hard to convince an assessor to lower the value over this kind of argument, because the business value is imbedded in the bricks and mortar," says Greenwood of Easley, McCaleb & Associates.
Some tax consultants say assessors are now willing to listen to the argument, but others see the opposite occurring. "It is an issue that assessors are getting more aggressive on," says Dondiego of Cushman & Wakefield.
High assessments, at times, are simply a way for cities and counties to meet their tax needs without burdening the citizens who vote. "Taxing jurisdictions are under more pressure to raise revenues," explains Hause. "One way to do that is raise tax rates, but that gets everyone upset," he says. "Raising the assessment on businesses only upsets a few people. So, it is the safest method politically."
Taking this into account, outside appraisers and tax consultants are not always viewed in the most favorable light by assessors.
"The reception we receive varies," says Hause. "Half the time, the assessors are professional public employees willing to discuss the information we bring them. The other half of the time, the consultant is considered a gadfly the assessor can do without. In these cases, the assessor stonewalls the process and forces you to take legal steps to get your argument heard."
Despite this sometimes confrontational approach, a negotiated settlement is reached about 90% of the time says Brian Chester, a principal at Krauser, Welsh & Cirz which is based in Morristown N.J. "Personally, I have never been involved with a case that went all the way through the courts."
Because negotiated settlements are the norm, rarely does either side get all of what they want, so property owners need to take this into consideration as the process continues. "There is a breakpoint for the owner," says Kramer of Keith M. Kramer Associates. "They have to judge the amount of savings that are still possible against the cost of continuing the negotiation process."