Many owners ask, “Should I file a property tax appeal?” If your property is not valued by the tax authorities at its market value, the answer is definitely “yes.” Most savvy owners evaluate this decision by a two-step process: They consider the practical aspects of the decision and develop an understanding of the differences between market value for property tax purposes compared with market value for investment purposes. It's crucial that an owner talk with a tax consultant or property tax lawyer when making this decision.

Owners need to discuss the procedures for appeal with a tax specialist in the state in which the property is located. This is a key point because laws vary on a state-by-state basis. These discussions provide an understanding of the possibility of success based on the particular state's procedures.

The next step is to evaluate the economics of an appeal by comparing potential tax savings with anticipated costs. Property tax administrative appeals are typically performed on a flat fee or a contingency fee basis, while services for court appeals are usually provided according to an hourly fee or a contingency fee.

The owner then needs to turn to the political realities of the appeal, including the likely response of the tax authorities, the publicity generated by the appeal and the owner's goals for the appeal.

Finally, an evaluation of the other resources that will be committed to the proceeding should be conducted, including the time that employees will need to dedicate to the appeal and the documents required for the taxing authorities.

Determining ‘Tax value’

In conjunction with the practical side of the decision, an owner should understand the definition of market value for property tax purposes vs. other purposes, and the practical elements that may make an owner hesitant to file an appeal.

Market value for property tax purposes is much different than the market value in an owner's “real” world. Owners typically evaluate market value based on the actual cash flow generated by the property. However, market value for property taxes is more hypothetical. It evaluates the property based on the potential market rent and vacancy of the property rather than the actual cash flow.

In addition, market value for property taxes does not include business value aspects of the income stream attributable to the property. Business value is generally found in such properties as hotels, retail centers and health care facilities. For example, a hotel flag may generate income for the property but that income is considered business value rather than real estate value and is not subject to taxation.

Making a Final Decision

There are several concerns that may make an owner hesitant to appeal. In financing, refinancing and due diligence, appraisals are regularly conducted. These appraisals are usually not based on market value for property tax purposes.

Thus, an owner should not automatically rule out an appeal because of the existence of these non-property tax appraisals, which are higher than the tax authorities' value.

An owner should not avoid an appeal simply because the recent purchase price is above the taxable value. There are many factors that may make the use of a sales price for property tax purposes inappropriate. These important considerations include a purchase based on actual cash flow rather than market value, as well as deals involving special financing considerations.

The decision to appeal should not be based solely on the prior year's operating statement. Tax authorities often use the past year's operating statement and capitalize the net operating income to arrive at a value. In a declining market, this will rarely reflect market conditions as of the valuation date. An owner should base his market valuation determination on the market rent and occupancy conditions as of the valuation date.

For most owners evaluating whether to appeal, the ace in the hole is a knowledgeable tax professional who can give a proper perspective on all the issues regarding a property. With this in mind, a property tax challenge may become an “appealing decision.”

Jim Popp is a partner at the Austin, Texas-based law firm of Popp & Ikard, the Texas member of the American Property Tax Counsel.