A property's sale price or refinancing value is not always equal to its property tax value. In the property tax world, sale prices and refinancing values are often evaluated differently by taxpayers and tax authorities. Accordingly, tax authorities treat a sale price that supports their opinion of tax value as conclusive evidence of that tax value. But, when a particular sale price does not support the tax authorities' opinion of tax value, they often claim that the sale does not represent market conditions or that one sale does not a market make.
Property owners too frequently elect to simply live with this dilemma until the sale of their property no longer controls the property's tax value. The American Property Tax Counsel (APTC), a national affiliation of property tax attorneys, addressed this issue at its annual seminar in Scottsdale, Ariz. The following are two of the many solutions discussed at that seminar: equal-and-uniform legislation; and the use of market-rent analysis as an explanation for sales or refinancing values.
Many states have constitutional provisions mandating that taxation shall be equal and uniform. Simply put, similarly situated taxpayers should be treated similarly, or comparable properties should be valued comparably. However, few states have effective remedies to actually accomplish this.
As a result, tax authorities often value a property based on its sale price without adjusting the value of comparable properties. This leaves a recently sold property at a competitive disadvantage to other properties that were not sold.
Texas has been particularly aggressive in addressing this problem and may serve as a model for other jurisdictions. For example, in 1997, a REIT purchased a Texas office building for $36 million. In 1998, the tax authorities valued the building at its sale price, which resulted in a substantial increase from 1997. None of the comparable properties experienced a similar increase in 1998. Interestingly, in 1997, the state considered the building only the 10th most valuable property in relation to the comparables. After the sale in 1998, however, it was considered the third most valuable.
By applying the equal-and-uniform provisions of the Texas Tax Code, the taxpayer reduced the property's tax value by $4 million below its sale price. Accordingly, equal-and-uniform legislation has proven beneficial to Texas taxpayers, particularly with respect to increases in tax values that are based on sale prices.
Many states determine property tax value based upon a fee-simple appraisal approach, rather than a leased-fee appraisal approach. The basic distinction is that a fee-simple appraisal considers parameters such as market rent, while a leased-fee appraisal focuses on the actual or contract rent of the property. Leased-fee appraisals are typically used in connection with financing and sales due diligence. It is this everyday use of leased-fee appraisals that creates difficulties in the fee-simple property tax world. Taxpayers are often reluctant to challenge property tax values that fall below sale prices or financing values.
Taxpayers should evaluate the rent aspect of the sale or financing before electing not to pursue a reduction in value. If an evaluation determines that the sale or financing was based on actual rent instead of market rent, a remedy for reduction may be available.
Market rent is an elusive target. The best indication of market rent would be if all the space in the building were to lease at the same time on Jan. 1 of the tax year. Obviously, this is not possible. By the same token, market rent is not the previous year's income divided by the occupied space, or the rent indicated by leases in place on Jan. 1, or the asking rent for the unoccupied spaces.
Market-rent stratification analysis is an effective methodology for hitting the elusive market rent target. It includes the consideration of the sizes of the rented spaces, the location of the rented spaces within the building and the type of tenant who will rent the space. Then, leases of the subject and comparables executed near the valuation date are applied to the stratification. The lease stratification analysis provides evidence to explain a sale or refinancing. By considering these solutions, taxpayers can proceed against the assessor even though the property has been sold or refinanced.