Property Tax Appeals
‘TIS THE SEASON for filing tax returns, as well as, petitions for real estate tax appeals.
Now that commercial property owners have taken a good look at their notices of proposed taxes sent late last year and at the actual bill that arrived in February or March 2008, tax attorneys are busy this spring helping them sort out whether their office, industrial or retail buildings were assessed at too high a value.
Attorneys say they anticipate an increase of appeals this season. With commercial property market values holding steady or in a few cases, declining there’s a higher likelihood that owners will be able to reduce what may be overestimated values made by assessors, says Gregory Soule, a partner with Best & Flanagan, based in Minneapolis.
“The assessor is likely, not intentionally, to have overplayed his hand,” he says.
Figuring out the correct value of a commercial property, however, is more a subjective process than it is a scientific one. And the result is more a compromise than a conclusion.
Each party has its own contrasting interests: Owners want to keep the value of their property as low as possible, so that their property taxes also stay low. Assessors, working for the city or county, are motivated to generate tax revenue to fill local governments’ coffers.
Complicating matters is timing. Not only is there a one-year lag (property taxes payable in 2008 are based on assessments made in January 2007) but there is also a delay in how assessors interpret market trends, says Thomas Wilhelmy, attorney and chair of the property tax appeals group at Fredrikson & Byron, based in Minneapolis.
Assessors have a tendency to follow the market down and lead it up.
“When prices are going up, nobody ever does real estate tax appeals because the natural lag of the assessor is to every taxpayer’s advantage,” says Soule. “On the other hand, when values take a tumble the assessor isn’t on top of how valuations have changed to the negative.”
Others say 2009 might be the bigger year for appeals.
Tom Musil says he hasn?t seen a widespread retreat in commercial property market values. Musil is director of the master of science program in real estate appraisal and the Shenehon Center for Real Estate Education at the University of St. Thomas. But that might change over the course of the year if problems from the housing market bleed over into the commercial market.
Complex system
Like everything that has to do with taxes, the system for determining commercial real estate property taxes is complex and influenced by a number of factors.
Property taxes are based on two components: the rate, which is a set percentage determining how much in taxes an owner must pay; and the estimated market value.
Political office holders set the rate. It varies per property, based on class.
Taxpayers don?t have any control over the rate, other than through politics. If owners don?t like their rate, ?vote the other way next time,? says Soule.
But taxpayers do have an opportunity to provide input about what the estimated market value is of their property, whether it be residential or commercial.
Taxes on commercial properties are typically 3 percent to 4 percent, says Myron Frans, a partner with Faegre & Benson, based in Minneapolis. So for every $1 million, property taxes will amount between $30,000 and $40,000.
Information about commercial property taxes arrives in a predictable timetable. What can be confusing is that the entire process begins a year before the actual taxes come due.
For property taxes payable in the current year, assessments are conducted near the beginning of the previous year.
Then, in February or March, property owners receive a notice of valuation, which is a proposed value for the building based on information gathered at the assessment, and other market data. Later, in November or December, a notice of proposed taxes is sent.
Owners usually get the bill in the spring of the payable year. They pay in two installments, one that comes due in May, and the other in October.
Taxpayers, therefore, have many months to mull over the various figures they receive in the mail. But it?s more likely that they?ll wait until late in the game to form an opinion, says Wilhelmy.
“They could gauge whether their value was too high or not, in February or March of the previous year,” he says. “But that’s not the practical reality. People look at that when they actually have to pay the bill.” “Besides old-fashioned procrastination, a company’s late fiscal year can also contribute to a delay in addressing the issue,” he says.
Two ways to challenge
If they disagree with all the numbers, owners have two ways to challenge their property values.
The first is to pursue an administrative proceeding, which involves going before one or more of the various subcommittees of the city or county taxing authority. It?s an informal process, where the goal is to get officials to consider any errors in their valuation, says Soule. No legal papers are filed.
Most attorneys, however, feel this option is a waste of time, and leads nowhere.
Taxpayers will be taken more seriously, say attorneys, if they file a petition. They have until April 30 to file a petition to appeal, which comes with a $240 upfront fee.
Either the tenant or the owner of a building can file a petition, but there can be only one action per parcel. So even if tenants and owners file separately, the county or city officials will notify them to file jointly once they complete their routine crosscheck, says Wilhelmy.
By filing a petition, owners are “actually initiating a lawsuit,” says Soule, so it’s a smart tactic for owners to front load with as much supportive information as possible. That means speaking with real estate experts, conducting market research, and gathering enough evidence to build a convincing case.
With very few properties ‘truly unique,’ Soule suggests owners look at other buildings that are comp
