Tax assessors sometimes face a real estate horse of a different color

The large, single-tenant office building or corporate headquarters facility is, indeed, a horse of a different color for purposes of real estate tax valuation. This article outlines where the assessor frequently goes wrong and provides a few ideas for shading the value toward your end of the color spectrum.

Quite often, the assessor will value these properties using the same methodology he applies to multi-tenant office properties. That is to say, he'll look at multi-tenant office rents (or the rent being paid by the single tenant), occupancy levels, expenses and capitalization rates. He will then simply apply those benchmarks to the characteristics of the large, single-tenant or corporate headquarters property.

If that's what has happened to you, you're probably being overvalued and should vigorously pursue an appeal on your property. The reasons are so numerous they almost defy description, but here are a few of the highlights.

Analyzing the investment

First, let's review the large, single-tenant office buildings. They are frequently build-to-suits and, therefore, often represent financing transactions as opposed to market-based real estate transactions. The rent is that amount required to provide a return on the investment of the developer. That investment, in turn, is dictated by the special needs or wants of the occupant and not by the desires of the marketplace.

If these properties were put on the market, the rent they would command is frequently much less than is presently being paid. There also may be usable space issues found in the corporate headquarters properties, because large amounts of space are devoted to ancillary, support-type uses. Normally, office market tenants are unwilling to pay for such uses.

Much the same can be said of the corporate headquarters facility, but with even greater emphasis. What follows are some of the amenities frequently found in corporate headquarters facilities that differentiate them from the more standard office building: expansive lobby area — both in terms of square footage and cubic footage (height, often in the form of an atrium); cafeterias and executive dining facilities; auditoriums, theaters and other large-group training and meeting facilities; expansive museum-like display areas, where the company's products and/or history are presented; health club facilities; and company stores, where the company's products are displayed and offered for sale to its employees.

Shading the values toward your color spectrum

Amenities like these create an issue pertaining to the efficiency of the building from an investment, or market, standpoint. While the corporate headquarters user, who is most often an owner-occupant, wants and uses these facilities, the market most often will not recognize them. Simply stated, the market is not willing to pay for space it cannot rent.

When corporate headquarters facilities are put up for sale, the market for them is unusually narrow. More often than not, they are sold to a converter who renovates the property into a multi-tenant office building. Of course, the converter has the normal conversion costs for turning the usually wide-open headquarters office space into multi-tenant space. In addition, there is the expense of converting these corporate headquarters amenity spaces into rentable areas that a new tenant will pay to occupy. Frequently, there is considerable income lost during the time it takes to convert and then lease the space.

There are even times when this feasibly cannot be done. For instance, if there is an expansive atrium lobby, that wasted space on each floor going up through the building will continue to be a loss. This will mean that the building has an unusually low ratio of rentable space to gross space, thereby decreasing the price that a purchaser would pay. Remember that the investor/purchaser is playing a finite numbers game — he'll only pay as much for a building as can be justified by the projected income from the property. Unrentable space doesn't produce income, and the assessor needs to recognize that fact.

If you have a large, single-tenant office building or corporate headquarters facility, you need to examine the value assigned to it by the local assessor in the light of these factors. These buildings are a “horse of a different color,” one that the assessor will not frequently recognize without being carefully shown the portion of the market spectrum the building occupies. An experienced property tax attorney (APTC member) can help you paint that picture.

Linda Terrill is a partner in the Overland Park, Kan., law firm of Neill, Terrill & Embree, the Kansas member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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