FEATURED ARTICLE

Property Tax Savings in a Declining Economy

Maybe there is a “Silver Lining” in the current severe economic downturn. With the economy on a steady decline the current market conditions should assist taxpayers in pursuing property tax appeals.

Just about every sector of the real estate market is being impacted by the current economic woes. With the increased national unemployment rate climbing, there is less of a need for commercial space. This is evident in the office market. The current national office vacancy rate is 15.2% (Wall Street Journal, April 3, 2009). In an effort to cut costs, companies dumped a record 25 million square feet of office space in the first quarter of 2009. This has been a blessing to tenants who are able to negotiate better rent deals.

The retail sector has really been affected by the lack of consumer confidence. Many retailers have closed their doors such as, Linens ‘N Things, Circuit City, and Fortunoff’s.  Also, faced with declining sales many retailers have or plan to close many stores and drastically curtail new store openings.

The hotel industry is also in the throws of a severe downturn. It is predicted that hotel values could drop as much as 30% this year, according to Moody’s Investor Service. The cap rate for hotel investment sales exceeded 9% in the fourth quarter, 2008 and continues on an upward trend. (Commercial Real Estate News, February 18, 2009).

Of course we all know what has happened in the residential market. Home prices dropped 12.4% during the fourth quarter of 2008, the biggest decline in 30 years. Cape Coral – Fort Meyers, Fl has the third highest foreclosure rate in the nation and property values have dropped 50.8%. Other examples: Saginaw, MI down 41.4%, Riverside- San Bernardino, CA down 40.8%, and San Jose, CA down 37.7%. While most areas of the nation had declining residential values the following have bucked the trend: Beaumont- Port Arthur, TX up 16.7%, Bloomington, IL up 9.6% and Dover, DE up 6.5%. (CNNMoney.com, February 12, 2009).

Even though the national economy is abysmal, it will still be an arduous task to argue your case for a property tax reduction. First, the taxing authorities are also hurting and they will strenuously defend their assessment base. Secondly, the negative market evidence that will be needed by the taxpayer to argue their case will not become available until later this year. Thus, the only available market information for 2009 appeals will be in 2008 and prior which is before the “Economic Tsunami” hit in late 2008. 

While the task will be difficult, it is recommended that taxpayers aggressively pursue property tax appeals during these trying economic times. Nothing is gained and much is lost, if an active appeal program is not in place during this recession period.

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CASE & POINT

Should improvements constructed upon leased land, and owned by the lessee, be included in the assessed value of a subject property? This is the question recently addressed by the Commonwealth Court of Pennsylvania in Tech One Associates v. Board of Property Assessment Appeals and Review of Allegheny County.

Tech One Associates (Tech One) owned some 48 acres of unimproved land in Allegheny County, PA. In 1989, it agreed to lease the unimproved land to Terra Associates (Terra) for a term of 50 years. 

Under the terms of the lease, Terra was to pay rent of $665,000 per year and was liable for all real estate taxes levied against the property. Furthermore, Terra was free to improve the land and own said improvements.

Terra eventually did improve the land with a 415,000 square foot shopping center consisting of 29 retail spaces, a movie theater and restaurant. Terra leased the improvements to various tenants and collected the rental income generated. None of this rental income was passed along to Tech One, as they continued to benefit only from the income generated by the original land lease with Terra.

Subsequently, the Allegheny County Board of Property Assessment, Appeals, and Review (Board) assessed the subject property at $30,984,700, cumulative of both land and improvements. Upon notification of this assessment, landowner Tech One filed an assessment appeal with the Board.

Tech One appeared before the Board and presented expert testimony concluding a full value of $9,500,000. The expert testified that his concluded value represents Tech One’s leased fee interest in the land. The expert placed no value on the improvements owned by Terra, indicating that Tech One, as the party being assessed, realized no economic benefit from the improvements upon their land. The Board agreed with this conclusion and accepted the leased fee value of $9,500,000. The Board placed no value on the 415,000 square foot shopping center.

The Board based their findings on the Supreme Court of Pennsylvania’s decision in Marple Springfield I (Marple). In Marple, the property owner entered into a long-term lease with tenant at well below market rent. The assessor however valued the subject property based specifically on market rents. On appeal, the Supreme Court reasoned that there exists an “economic reality” that must be recognized when valuing real estate encumbered by a long-term lease. Namely, the capitalization of actual income is the most appropriate, if not the only valid means of establishing the fair market value of a property encumbered by a long-term lease.

The Tech One Board concluded that to value Tech One’s property based on anything other than the capitalization of the contract rent realized from Tech One’s land lease with Terra would be to violate the Marple holding.

The taxing bodies appealed the Board’s decision which was reversed at trial. That reversal was later upheld by the Commonwealth Court. The Commonwealth Court concluded that the economic realities discussed in Marple don’t apply to the Tech One case. Because the lease between Tech One and Terra specifically provides for Terra to pay all resulting real estate taxes levied against the property, the landowner Tech One’s economic reality would not change based in any increase in taxable value.

To read the full body of this case, please click here.

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TAXING ISSUES

Foreclosures and Property Tax Assessments

Texas Property Tax Appeal Pilot Program

Tax Appeal Dismissed Due To Inappropriate “Reconstruction Cost Approach”

Maricopa County Engaged In Discriminatory Property Tax Valuation

A Good Big Box Property Tax Appeal Case

Florida Shifts Property Tax Burden Of Proof

More…

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