COMMENTARY: Taxing... or appealing?

By Trey Brice In these volatile economic times, property values continue to decline, and tax values continue to rise. While assessors are doing their best to stay current, the market is just changing too fast. What can you and your clients do about it? Review and appeal the property tax assessments. This article explains the process, the opportunities and the pitfalls. Reputable experts are forecasting that the Michigan real estate market has hit bottom and we should begin to see a slowing in the market decline, followed by stabilization in property values and eventually a gradual increase. While we all hope this is true, the fact that our market dropped so rapidly has left us in a situation where market prices are going down while property taxes increase. It seems illogical, but that is our property tax system. Property taxes have a huge impact on all taxpayers, including both the direct costs and the impact on a property's bottom line making it important to continually review your property's assessment. Michigan's Proposal A, adopted in 1994, limited, or placed a cap on increases to taxable values and property taxes. Properties taxes involve four values: taxable value, assessed and state equalized values (which for all intents and purposes are essentially the same), and capped value. Under Proposal A, property taxes are not based on assessed value or half of the market value. Property taxes are calculated on the taxable value, which for properties that have not been transferred equals the capped value, which is calculated by multiplying the prior year's taxable value by the lower of 5% or an inflation rate multiplier (IRM) as determined by the state. For 2011 the rate is 1.7%, meaning a property's 2011 taxable value is calculated by multiplying the 2010 taxable value by 1.017. Taxes are calculated by multiplying the local millage rate by the taxable value. (By law, the taxable value for a property that transferred is uncapped and increased to equal the assessed value.) Because the taxable value can only increase by the IRM or 5%, unless there is a transfer of ownership, a spread occurs between the assessed value and the capped value. Prior to the market downturn the average spread had been about 20%. And while the market decline has dropped the assessed values closer to the taxable values narrowing the spread, the owners of the numerous properties that still have a spread will still see the taxable values increase. Unless the assessed value declines by more than the remaining spread, property taxes will increase even as the market value declines. Importantly, however, is the fact that even where the assessed values have dropped to close the spread or even possibly force the taxable values down, this does not mean the properties are correctly assessed. In all likelihood, unless you have filed a property tax appeal in the last few years, the market shift has left your property over assessed causing you to pay too much in property taxes. Property owners should carefully review their assessment notices. If the assessment does not reflect the property's true valuation, the owner needs to consider appealing the assessor's value. Any appeal should review the following factors, any one of which may lead to a lower tax assessment. (1) Review the property data listed on the assessor's record card. An error in the property data, such as the property's age, total square footage, net leasable area, and number of units can increase a property's overall assessment. An owner can provide current rent rolls and/or a site plan to accurately show the building's floor plan, square footage and total area of the underlying property. (2) Review how the assessed value was derived. There are three approaches to valuing property: cost, income, and/or sales comparison. The assessor's initial assessment generally derives the market value from a combination of the cost and sales comparison approaches. Yet, the cost approach is the least reliable if the property is several years old as it is may be difficult to accurately determine depreciation and obsolescence factors. If the assessment is based on the cost approach, an owner should provide income and/or sales comparison information to provide the assessor a more accurate picture of the property's valuation. (3) Review whether and how the assessor applied the income approach. Once the appeal has moved beyond the initial assessment, the owner and assessor should discuss how the property should be valued using the more reflective income and comparable sales approaches. Part of the discussion, should be a review of how the assessor has utilized the income approach. Assessors generally use market-rent, vacancy, and expenses to arrive at a net operating income (NOI), which is then capitalized using a market capitalization rate. Owners, however, estimate market value based on the actual income generated by the property. The differences between actual income and market factors can often support a value reduction. Owners should be prepared to provide the assessor data from the property's operating statements because, the market factors used by the assessor may be from properties that for one reason or another are not directly comparable to the subject property. Showing differences in rental rates, occupancy, tenant concessions, income and expenses, and the location and condition of the properties used by the assessor, may provide the possibility to revalue the property based on properties and a capitalization rate that are more comparable. (4) Review how the assessor applied the sales comparison approach. Assessments and negotiations also focus on sales of comparable properties. Just as mentioned in reviewing the income approach above, it is important to ensure that the physical and economic differences between the comparable properties and the subject property are truly comparable. An owner can identify factors that influenced a buyer's decision to purchase a property which the assessor may be unaware of, such as below-market financing, location in a city with a lower tax rate, or that the sale was motivated by time constraints or foreclosure, or purchased at an above market rate by the in-place tenant. If the assessor is unaware of such elements, he or she may incorrectly use a sale as comparable when the purchase factors show it is not. (5) Review the benefits and costs of an appeal. Whether or not to begin a property tax appeal requires an economic decision. Not only should potential tax savings be weighed against the time and costs associated with an appeal, but in our declining market there are important non-monetary benefits to consider as well. Even if an appeal does not reduce the taxable value, lowering the assessment will make the property more attractive to a prospective purchaser and place it in a better position for sale on the market. An owner must consider the risks of an appeal. Filing an appeal opens the property to the assessor, and if the property has been under valued due to an error in how the property is identified or listed on the property record, the assessor will have an opportunity to correct the error which may actually increase the assessment. Property owners that review and understand the basis for their property tax assessments, are in the best position to correcting basic errors in the assessment records and dispute how the assessor has applied its valuation methodology in the aim to obtain a corrected assessment and in the process hopefully a property tax reduction. ---------------- Trey Brice is a partner in the Southfield office of Jaffe, Raitt, Heuer, & Weiss where he leads the firm's Property Tax Appeals Practice Group. Brice counsels clients on property taxation issues and represents property owners, managers and lessees before the Michigan Tax Tribunal and State Tax Commission in property tax appeals for commercial, industrial, residential and developmental properties. He can be reached at (248) 351-3000 or tbrice@jaffelaw.com. Published: Fri, Mar 11, 2011