When you think of property taxes, more than likely two things come to mind: (1) payment of personal property taxes on equipment and fixtures, and (2) payment of real estate taxes on buildings, land, and other real estate improvements. The focus of this article is on assessment issues and payment of real estate taxes.
Assessed Valuation Notices
During this time of the year many companies will be reviewing and updating their records to complete self-reporting requirements and file real estate tax returns either with the state or local taxing jurisdictions. As you complete these tasks, it is important that you also scrutinize what is being reported to the state or local government regarding your property. Why? Because how your real estate properties are valued has a direct impact on the final tax bills issued at the end of the year.
While it is too late to contest 2014 assessed values, it’s not too early to start thinking about 2015. For most of our clients, 2015 assessed valuation notices are right around the corner. Keep the following in mind when you receive your assessed valuation notice:
- Pay attention to prior-year values and any year-over-year increases. Assessors make changes to their mass-appraisal valuation models that can affect your value even if nothing has changed with your real estate.
- Have you had a recent appraisal of the property? Is the appraised value lower than the assessed value? Is the assessed value higher than what you could achieve in today’s market if you were to sell the property? Your property might be overvalued for property tax purposes.
In addition, in revaluation and maintenance years, assessors are obligated to send out new values or change notices to taxpayers to allow them time to object to values if warranted. It is important that you are aware of the rules and timing of the revaluation notices for your state or local jurisdictions. When you receive these notices, pay close attention to the updated values.
Valuation Techniques for Appraising Commercial Real Estate
Assessors have an obligation to keep assessments fair and equitable, so consistency is important. There are three universal valuation techniques used in appraising commercial real estate:
(1) market approach,
(2) income approach, and
(3) cost approach.
Market Approach. The market approach (sales comparison) is the most commonly used and recognized approach for valuation and assessment purposes. This technique considers sales of comparable properties while making adjustments for their differences. This approach is easy to understand and a reliable indicator of market value, but oftentimes there is limited data for unique properties.
Income Approach. The income approach is the second most recognized approach, whereby value is determined by analyzing market rent and typical expenses and applying a market capitalization rate. This approach provides a value based on net operating income, and the property doesn’t have to sell, but there can be limited data for special-use properties. In addition, capitalization rates can be subjective and have a major impact on value.
Cost Approach. The cost approach (cost less depreciation) is also a recognized method for valuation and assessment. This approach is effective in being systematic and uniform and in determining separate values for land and buildings. The challenge with this approach is that determining depreciation can be subjective, and cost is not always a good indicator of market value.
Comparing real estate to other properties (sold, available, or assessed) can give you a strong argument for a reduction. We highly recommend doing internal data reviews and data comparisons, but it is more important to compare your assessments to external data. Market value may not be what your property is worth to you, but what your property is worth to others (the market). As you have heard before, a property is worth what someone will pay for it.
Review your assessed value and look at the current market data. If you believe your assessed value is too high, there can be an informal review process with the assessor called “open book.” This is an information-sharing opportunity that can often lead to a correction in assessed value. If the assessor is unwilling to make a change, then you would need to file for a hearing date with the local Board of Review; adjustments are unlikely at this level. If you are unsuccessful, legal remedies are possible, but they can be very expensive to pursue.
Understanding whether your commercial real estate has been appropriately assessed can be very complicated. Wipfli has a dedicated group of real estate professionals who are knowledgeable about the tax assessment process and valuation methodologies. Let Wipfli help you to ensure that your property has been appropriately assessed and is not subject to excessive taxation.