Expert Guidance To Effectively Navigate the Process
By Margarita Foster of LoopNet
In this two-part series, LoopNet explores the basics of commercial real estate (CRE) property assessments and how commercial property owners can appeal them as tenants walk away from leases or fail to renew during the COVID-19 pandemic. Part one focuses on assessment challenges faced by owners and assessors relative to occupancy declines and how they can be overcome. Part two, below, outlines the three phases of the typical real property assessment appeals process for CRE and provides insider guidance to help property owners navigate the process effectively, improving their chances of a successful appeal.
LoopNet spoke to Martin Lutsky, a principal at management consulting and CPA services firm Clearview Group, who possesses decades of experience working in government and private industry, including 18 years with The Rouse Company as director of property tax. He currently focuses on assessment appeals in the mid-Atlantic states but has worked in more than 40 markets across the United States. He believes property assessment conditions and processes in Maryland are generally analogous to those across the country, so examples in this article have been drawn from that state.
Three Levels of Appeals
Lutsky outlined the three levels of appeals common to Maryland counties and across the U.S. He also highlighted what it takes for a property owner to succeed at each level of the process and ultimately win an appeal in court. The three levels he discussed are:
1. Supervisor or informal review.
2. Assessment appeals board.
3. Tax court or general court.
“The first [level] is an informal meeting to learn how the assessor arrived at the property value, the second involves a citizen board that reviews the property owner’s case and the third is a hearing before a judge,” in tax or general court Lutsky said.
Before Taking a Case
Before agreeing to take a case, Lutsky conducts an initial assessment to determine if the appeal has merit.
Opportunity Review. “The first thing I do is what I call an ‘opportunity review,’” said Lutsky. During this phase he gathers information about the subject property and compares it to market trends. “I look at the history of your income and operating expenses and see how that history flows.” If overall market trends have negatively impacted the property, and the documentation he gathers supports this, he will agree to argue the case.
Operating History of the Asset. To understand the operating history of an asset, Lutsky typically conducts a detailed review of the operating statements for three prior consecutive years and also examines rent rolls or occupancy reports, recent leases and renewals, capital expenditures or replacement reserves, recent sale history and submarket trends. “Our review of the operating statements is typically line-by-line, identifying trends and abnormalities and comparing them to percentage or dollar benchmarks for similar properties. All of this is compared to market or submarket trends and comparable sales to identify how this property compares,” Lutsky said.
Level 1: Supervisor or Informal Review
Once he believes the case has merit, Lutsky works on filing a first-level review. “After I understand your property, I connect with the Maryland Department of Assessments and Taxation (SDAT) to file a first-level review. I want to learn how the assessor developed your value. The objective here is to identify and focus on the metrics where you disagree, which may help you prove your point,” said Lutsky. “Part of that has to do with determining if the assessor understands the nuances of the property, its location or issues, because these nuances will build and support the case.”
Independent valuation and document collection. During this phase, Lutsky focuses on two key tasks. First, he sets out to value a property independently and develop a professional opinion about what it’s worth. Second, he concentrates on gathering information from the assessment department, such as a record card, worksheet, workpapers, etc., so he can compare his analysis to theirs. He may find that he agrees with their revenue assumptions, but not their operating expenses. At this point, “I need to go in there and discuss why my operating expenses are what they are.”
It is during this first-level review that the hard work of gathering documents is carried out. Meaningful documents that property owners should have available include site plans and leasing brochures, operating statements, rent rolls, recent lease abstracts and both prior and planned capitalized expenditures. The objective is to paint an honest picture of both the past and the future expenses and revenue related to the property.
Securing a hearing with an assessor. A hearing with an assessor is typically scheduled four to six weeks after filing, but during the pandemic the lead time has been two to three months or more and hearings have generally taken place over the phone. A session with a supervisor usually lasts 20 to 30 minutes and an agenda is normally followed. First, there is a discussion about the specifics of the property, including the physical condition (i.e., size, age, quality and design), the location, financial history and trends. These factors are compared to market trends such as occupancy, rental rates and upcoming lease expirations that could lead to increased vacancy. “The discussion will then focus on where we agree and certainly where we disagree with the assessor’s workpapers,” Lutsky said.
For example, “let’s say they valued the property at $10 and I say $8. After I file the first-level review, they come back at $8.25. I may not chase that last $0.25. I’ll tell the property owner that we were able to reduce the assessed value by 18% and that’s a pretty good number.”
“Our target is always a ‘fair and reasonable’ valuation,” Lutsky said. To achieve this goal at every level of the process, the assessors “must recognize that you’re being honest and forthright,” Lutsky said. “If you raise too many issues that don’t have value, your argument may become diluted and you start losing everything.”
Generally, 60% to 70% of well-documented appeals can be resolved at the first level, said Lutsky.
Level 2: The Assessment Appeals Board
If the property owner disagrees with the outcome of the supervisor hearing, the appeal continues to the Property Tax Assessment Appeals Board (PTAAB). These boards, located in each county throughout Maryland, consist of county residents. “The best you can hope for is they have experience and knowledge in real estate. I feel sometimes with these boards, because they are residents, they think that if they reduce commercial assessments, their own taxes could go up,” Lutsky said. However, for the most part he finds them to be fair when reviewing the data and information presented.
But Lutsky stresses that the burden of proof is on the property owner because the assessor is deemed to be correct. “I have to really prove that he was totally wrong or that I’m at least 70% plus correct.” It is critical for the tax consultant to argue a very strong case when going before a local board. “To do this, they need to be very clear on the issues and focus on the two or three reasons the assessment should be adjusted. Provide facts, include support, document your work and stress you are looking for a fair and reasonable outcome — not shooting for the moon,” Lutsky said.
Composition of appeals boards. Appeals boards vary in size; for example, in Maryland, they generally comprise three members, with an alternate, while in Virginia such boards could include up to nine members.
At this level Lutsky said that “appeals cases rejected by a supervisor but overturned by an appeals board might occur because the supervisor was overwhelmed with too much work or lacked experience with the property type in question. Outliers that supervisors might not be familiar with include a sale/leaseback (link) transaction, a manufacturing plant versus an industrial/warehouse building, affordable housing versus market rate communities, a marina, a restaurant or a hotel, since these are operating businesses versus pure real estate.”
Typical steps involved with an appeals board. In Maryland, and in most states, the argument at the first and second levels is about the valuation and legal counsel is not necessary at the second level. States like New Jersey and Pennsylvania are exceptions; legal counsel is required at the second level, but the argument still centers on valuation.
The basic chronology with a review board differs slightly throughout the country. Generally, in Maryland, the taxpayer presents and the board asks questions; the assessor then presents and the board may ask questions for clarification; the taxpayer gets to rebut and close, and the board might ask additional questions or close.
Level 3: Tax Court or General Court
If a property owner is not satisfied with the findings of the appeals board, they have a final chance to revise the assessed value in court. Lutsky explained that the type of court that hears the appeal differs from state to state. In some states, the appeal is heard in general court, and in others, like Maryland and New Jersey, it is tried in tax court. In states like Virginia, appeals are heard in circuit court. Lutsky said a major challenge in circuit court is that “the judge has heard a robbery right before he hears my appeal … and he might not have the knowledge in real estate to understand what we’re presenting.” In places with tax court, “you have judges that understand what you’re talking about,” so presenting the case is more straightforward.
In tax courts, judges often hold hearings related to tax matters beyond real estate, examining personal property and sales and tax issues as well. Because they specialize in tax assessment topics, they are often able to focus on the core issues of the argument more quickly than judges without this body of knowledge.
“I have been fortunate to have worked around the country enough to understand that it’s localized and I’ve got to learn and understand the rules before I show up,” Lutsky said. “For instance, I cannot directly represent you in Pennsylvania. I need the owners to engage an attorney, and I will work with them directly, but they [and their attorney] will present before the judge.”
But that hand off to the attorney can cause problems, because when they are speaking extemporaneously before a judge, they may not be as familiar with the specifics of the case as the consultant that built it from the ground up and they may not emphasize the elements the tax consultant believes should be highlighted.
Professionals presenting on behalf of the municipality. Presenters will vary depending on the location. In Maryland, there are state attorneys and/or assistant attorney generals that represent the SDAT before the tax court. In other states, they rely on city or county counsel. The formality differs not just by state but also by municipality or jurisdiction, so there are many variations.
Both sides are represented by counsel and the hearing becomes a typical “court case” with both sides presenting their experts, evidence and opinions. The length of the hearing differs depending on the complexity of the case. A straightforward appeal about an office building might take one day, while a more complex case, like one involving a hotel, could take several days.
Winning the appeal in court. Lutsky said that if your argument is well presented and documented, the assessors may be more agreeable and that will carry forward to review boards and courts. He emphasized that clear documentation relating to the asset in question is powerful evidence. For example, owners that present actual cost figures for operating expenses will likely prevail over assessors that use standard ratios. For a marina, or any other operating business like a restaurant, hotel, golf course, nursing home, etc., you need to value the operating entity and then allocate or separate that value into the components of real estate, personal property and any intangibles or enterprise value.
Lutsky summarized that “for a successful outcome, property owners need to provide complete and accurate data to their consultant, allow time for the process, and be reasonable in their expectations.”
To view part one of this series, visit here.