Many, if not most, large disputes on business or large, valuable commercial properties are settled at an informal level with the tax assessor. Large commercial properties are usually handled by a tax representative. As stubbornness sets in or as complications increase, a taxpayer’s next resort is to appeal to a hearing panel as noted above. While a taxpayer can always represent himself, he probably needs to enlist the services of a tax representative, a certified or designated appraiser, a lawyer or some combination.
A tax representative is typically for hire as an advocate. Tax representatives in many states are required to register with the state (though CPAs and attorneys can be exempt from registration). Beyond an attorney or CPA, a typical tax representative is an advocate. Compensation may take many forms, often a percentage (30% to 40%) of tax savings for the first two years.
A CPA and/or designated or certified real-estate appraiser may play the role of tax representative. Depending on professional ethics and state law, a CPA or appraiser may or may not be allowed to take off his professional hat to become an advocate. If he is acting as an advocate, this should be made clear to all parties. Fees based on a percentage of the savings may violate certain professional ethics standards, so the professional will charge by another method, typically by the hour.
Report requirements are often kept simple at the panel hearing level. A valuation (not a professional appraisal) may be based on an unadjusted unit of comparison instead of reflecting adjustments for differences between the subject and comparable properties.
Another simple measure is a gross rent multiplier (GRM), which is the value or price divided by effective gross income. Rental properties that are similar in age, location, condition, and tenants should have similar GRMs.
A direct capitalization (cap) rate may be applied to the property’s net operating income to provide a value indication. For a fair comparison to use in property tax matters, the tax expense is not deducted as an operating expense. Instead, the cap rate is loaded by adding the tax rate. The purpose of this loading is to prevent the tax amount from affecting the value.
If the matter gets beyond the panel hearing, a lawyer will be necessary.
If a case goes to trial, expect to pay for qualified experts. In a real estate matter, a state-certified general real estate appraiser offers minimal qualifications. In addition, there are many other professional designations that are sought: the MAI is thought by many to be a prestigious designation. In business appraisals, the ASA, CFA and CPA/ABV are strong designations.
My recent personal experiences include these:
- Petroleum Refinery
A major refinery on the Gulf Coast had been assessed at $800million to $825 million in recent years. For 2000 and 2001, the tax district raised the assessment to $1 billion, notwithstanding huge expected costs the company must fund to meet locally mandated pollution-control requirements. When they were unable to agree on an assessment, the refinery and tax district went to court. Both sides accepted expert binding arbitration in lieu of the refinery attorney’s expected request for a change of venue. The tax district hired a team of experts that appraised the refinery at $1.85 billion for 2001. As a rebuttal witness, I demonstrated that the district’s valuation erroneously assumed (a) an egregiously low capitalization rate; (b) that the refinery would earn a rate of return on capital needed to meet clean air requirements, including strict locally mandated attainment standards; (c) minimal value for nontaxable intangible assets that were to be subtracted; and (d) a value for the refinery that was dependent on relationships with other divisions of the parent oil company. The arbitrators reduced the assessment to $600 million.
- Public Utility in a Rural County
In many states — but not in a certain one — tax assessors must follow the “unit” rule to assess public utilities that operate in multiple jurisdictions. Under the unit rule, the utility is appraised at its entirety, and then certain separately assessed property is subtracted (for example, power generating plants to be assessed in place). The remainder, principally transmission and distribution equipment, is allocated to each county. The allocation is based typically on original cost (OC) or on original cost less depreciation (OCLD).
In this manner, for states that mandate unit valuation, all of the utility’s assets are taxed at a total amount that equals 100 percent of their value. This provides relative fairness in that one county cannot assert that wires in its jurisdiction are more valuable than those in another jurisdiction. If this were allowed, it would never result in 100 percent taxation of the company, as each jurisdiction would assert a value greater than its fair share.
The state where I was engaged does not follow the unit rule. One rural county decided to tackle a behemoth power company, and both must face huge litigation expenses. The judge was not convinced that either side’s appraisal was appropriate. Although the power company’s expenditure on the matter to date far exceeds the tax difference, they felt they had to fight to prevent possible abuse from other counties.
- Cable Class Action Suit
A certain cable television operator passed through to its customer-subscribers approximately $3 per month for 10 years. The total was nearly $30 million. A class-action suit challenged the company’s right to pass the costs through. My research and report showed that the ad valorem tax was applied to the company in a manner that was unduly discriminatory, which would allow the pass-through. Soon after the report was received, the matter was settled. The cable company provided most of the agreed settlement through coupons subscribers could use to increase their level of patronage (for example, by adding premium channels to their monthly service). This outcome was highly favored by the company, as it was compatible with marketing efforts to enhance subscriptions. Later, the law was thrown out as unconstitutional. Cable companies were taxed as a business, while satellite companies paid no tax.
- Retail Inventory
Retail inventories of certain goods are in their worst condition as of the December 31 valuation date. The assessors equated the accounting book value of inventories to the market value definition for ad valorem tax purposes. Having designations in both accounting and appraisal disciplines, I was able to demonstrate the differences in definitions and values to be derived. Partial success helped the retailers obtain assessment reductions in major areas of operations in the state.
Property tax challenges are a way to increase earnings or disposable income for a home or business owner. It is important to understand the facts, judge the likelihood of success and amount to be gained, then proceed if appropriate. As the matter progresses, the team selected for the challenge must be capable at each level. Still, the owner must “know when to hold ’em and know when to fold ’em,” that is, when to fight and when to quit fighting.
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Jack P. Friedman, CPA, ABV, CFF, PhD, is a real estate author, appraiser and economist in Dallas, Texas. He is a state-certified appraiser, with ASA, MAI and CRE designations. www.realexperts.com