Why Recruiting Top Legal And Appraisal Expertise Can Be ‘A Very Powerful Combination’ In Property Tax Appeals

Average property tax rates range from 1% to 5% of market value, accounting for a significant share of property owners’ operating expenses. 

These tax rates can vary widely based on local laws and regulations across the country, but one aspect is certain: Property owners need to make sure they are being taxed fairly under local laws. Frequently, owners and their tax representatives may not know how to navigate through different jurisdictions to identify what is taxable and what isn't.

In many cases, real estate, business values and other intangibles can get easily lumped together, resulting in property owners paying more than they should. This is an illegal and unfair financial burden on owners, requiring them to pay taxes that aren't commensurate with their real estate's fair market value.

If an owner feels their property has been valued inaccurately, they can opt to file a property tax appeal. But the legal implications of this process can be very nuanced and strenuous. Moving an appeal forward can expose taxpayers to either a lesser reduction or, worse, an increase in assessment if the appeal isn't managed by seasoned attorneys who are well versed in valuation methodology and local statutes.  

“The fair market value of a property should dictate how much you're going to be paying in property taxes,” said Molly Phelan, partner at Siegel Jennings, a national property tax law firm. “However, what is and what is not part of the fair market value should be closely examined.”

Phelan said assessors typically work on a mass appraisal system, looking at market data and seeing which property classes have gone up or down, making adjustments to specific assets as necessary. But rarely does the mass appraisal system look at the nuances of the individual transactions and remove portions of a transaction that shouldn't be taxable in that specific jurisdiction. This is particularly obvious when a fund or large investor buys a portfolio of properties, she said. Reported allocations for federal tax or financial reporting may not have anything to do with the fair market value of the taxable real estate under the rules of property taxation in a local jurisdiction.

Jurisdictions have different criteria and reassessment periods, but the underlying process is the same: When assessors release new property values, the taxpayer should seek specialized tax representation to determine whether the assessment is in line with the taxable market value of the real estate per the rules of the jurisdiction, she said.

“In many instances, the taxpayer is unaware how vastly incorrect the value proposed by the assessor is,” Phelan said. “Solely looking at the full sale price of a transaction is very misleading and most often will lead to unreasonable high taxation.” 

Phelan works closely with appraisal professionals like Mary O’Connor, principal of forensic and valuation services at Sikich, a global professional services firm, to understand a property’s true allocation of value, both to the taxable real estate and the nontaxable business assets. 

“As a business valuation expert, I look at the transaction of a commercial property and quantify what portion of the income relates to nontaxable business and then the rest as it relates to real estate,” O’Connor said. “I work hand in hand with a real estate appraiser, and together we see how everything fits together. The attorney makes the legal argument. It's a very powerful combination, and taxpayers are well served to use this strategy.”

O’Connor said property assessments can be very culture-driven, depending upon a jurisdiction’s policy regarding local businesses. That is why it is important to know the background, expertise and leanings of the assessor and the staff.

“If you're working with an attorney or appraiser who doesn't understand the nuts and bolts, law, tax rules and case law of that locality, you're wasting your time,” she said.

The property tax appeal process isn't something that can or should be automated, either, O’Connor said. Artificial intelligence and canned software may appear to save fees but aren't up to this task. She said the intervention of expertise, both legal and appraisal, to get to the right answer will always be a crucial step of the local appeal process. 

Throughout the U.S. and Canada, there is a prohibition against double taxation. Income tax systems tax business assets and property tax systems tax real estate, or “the bricks and sticks,” she said. That division is the heart of the exercise over whether taxation is legal. For real estate that has a very large business component, such as hotels, senior living centers, entertainment venues, and even office buildings and shopping centers, 30% to 40% of the assessed value is rightfully assigned to the business component of the property, which is a considerable sum that is nontaxable, O’Connor said. 

“This is substantial savings,” she said.  

This principle has been litigated and firmly established in California in cases such as Olympic and Georgia Partners LLC v. County of Los Angeles where it was determined that the county assessor included nontaxable, intangible business assets in the original assessment. This principle was upheld for the Disney Yacht and Beach Club in a much-followed case in Florida.

“A well-functioning hotel needs brick-and-mortar, specialized equipment, the capabilities supplied by a franchise, such as revenue management, a management agreement, profitable amenity centers and a trained workforce,” O'Connor said. “All work together to produce a profit to ownership. Unfortunately, many assessments define all income, even that income derived from business functions, as taxable real estate. Or the entire purchase price is ascribed to taxable real estate. This is simply not true. Hence, many properties are overassessed.” 

The importance of ensuring that property owners are being fairly assessed can't be overstated given today’s market conditions, Phelan said. Commercial property values have dropped an average of 7% since last year, and economic uncertainty still looms throughout the sector.

“You need legal talent that can navigate the law and appraisal talent that can execute on the nuances of valuation, and that's not on every street corner,” she said. “Not using a law firm that truly understands real estate taxation on a granular level is going to result in a lot of unfair taxation.”

This article was produced in collaboration between Siegel Jennings and Sikich and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.