The latest property tax bills are giving property owners a severe case of sticker shock—especially if they are still in the process of getting a new income-producing property to actually produce income! If you own a commercial property, you may find yourself hustling to cover the cost of your recent tax bill. Before the next bill is issued, one of the best uses of your time may be to learn how to appeal your property tax assessment.
Since property taxes are based on the value of that property, the key is to make a solid argument for a lower valuation. Property valuations are determined by assessors who are employed by local governments and can happen yearly or every few years. These assessors have a wide range of factors to consider when making a valuation: the age and physical condition of the property, local rental rates, market conditions, and more. If these assessors fail to consider key details or recent changes, property owners can use this to argue for a lower valuation and reduce their tax bill.
Our last blog [link here] covered the basics of filing an appeal and understanding the type of evidence you can include to back up your case. Today’s blog will cover the different methods for property valuation, specifically commercial properties. This includes non-residential properties, such as warehouses, office buildings, medical offices, laboratory space, manufacturing plants, and similar properties that might be rented out to businesses, as well as apartment complexes with 5 or more units. If you own a commercial property, read on to learn the basics of valuation.
How Property Tax is Calculated
In order to appeal your tax assessment, you will need to make a case for a lower valuation. Each state and locality may have different rules that will tell you which valuation methods are allowed. Overall, you will be choosing from one of the five methods below. If all methods are acceptable in your jurisdiction, how do you know which one to use? Simply choose the method that will give the lowest possible valuation.
Remember, by submitting an appeal, you are only challenging what a local assessor says a property is worth. This will not change anything from a federal tax perspective, such as the depreciation on the property or your ability to claim a loss on your tax return, which can only happen when you dispose of the property.
The five methods used for commercial property taxes are:
- Fair Market Value Approach
- Cost Approach
- Commercial Equity Analysis Approach
- Income Approach
- Land Evaluation Approach
Below, we will cover the two most commonly used methods: the fair market value approach and Assessors gravitate towards these methods because they usually already have access to the data needed for these approaches. However, as you are preparing your appeal, if one of the other approaches may net you a lower valuation, you can apply a different approach as long as it is allowable in your community.
Fair Market Value Approach
The fair market value approach compares your property to similar properties that sold recently. The idea here is that the current market price determines how much a property is worth. Your goal will be to argue that your property cannot realistically fetch the price suggested by your valuation. This is not a far-fetched claim, since assessors may very well be using old numbers, such as the price you originally paid for the property, to set its value.
Look for signs like property sales prices dropping in your area. Maybe your neighborhood was the popular side of town when you purchased the property, but now a new development has been built across town, and all the business is flowing there. Maybe changes to the roadway leading to your property make it harder to access or restrict parking options. You are looking for factors outside your control that could cause property values to dip—anything along these lines could be used to argue for a lower tax assessment.
You will need to collect data on at least three properties that are comparable to yours, with a similar location, size, and age. To prepare your appeal for the tax assessor or review board, collect documentation that shows the information below for each property:
- Date of the analysis
- Property address
- Proximity to your property
- City
- Tax district
- Tax assessor parcel number
- Total appraised value
- Source of market sales data
- Date of sale
- Amount of sale
- Approximate appreciation per year
- Fair market value
Optional information to include is the total square feet, the land appraised value, and the improvement appraised value of these properties.
Finally, you will use this information to calculate the real value of your property (according to your argument). Take the total assessed value and add the cost of improvements. To get the improvement number, divide the appraised value of the improvement by the number of square feet of the improvement.
Cost Approach
What if you cannot find the sales data for three or more three or more comparable properties—or what if the fair market value approach does not give you a lower valuation? It might be time to consider the cost approach. This method looks at what it would cost to purchase a similar piece of land and construct a similar building and uses this to value your property. This is the most common approach used by assessors, usually because it is the easiest to estimate.
The formula for the cost approach is:
Replacement Cost + Land/Site Value – Depreciation Factors
The biggest opportunity for savings here is typically these depreciation factors—in other words, anything that might contribute to devaluing your property. The main things you’ll be looking for are:
- Physical depreciation
- Economic obsolescence
- Functional obsolescence
Do you have an older piece of property or a building that is in need of repairs due to wear and tear? This can be cause to claim physical depreciation.
Is your building in a less desirable location—or is it less attractive or more outdated than other buildings in the same neighborhood? These can serve as examples of economic obsolescence. A newer or more attractive building will likely sell for more money or draw a higher rent. However, that is to our advantage when arguing for a lower valuation amount.
Finally, is there anything about your property that makes it less accessible or functional? Lastly, say you have an older property where the driving lanes and spaces in the parking lot are very small, so they do not accommodate bigger SUVs and similar vehicles. You can actually separate the part of the price that relates to the parking lot and apply a different depreciation factor. This would count as functional obsolescence.
To take another example, say your property has basement-level offices. You could apply a different depreciation rate to this space, since prospective tenants may not be as interested in renting there or may not be willing to pay as much in rent. Customers may have a less enjoyable experience waiting in a windowless basement space, or they may struggle to connect to cellular service. Any of these factors can affect income and therefore lower your valuation.
Summary
Most property owners never think to appeal their property tax assessment—but an over-assessment is much more common than you might think. If your area allows different approaches to property valuation, this can provide a way to argue for a much lower valuation. The key is to understand the differences between these methods and which are being used by your local assessors. Then it is just a matter of doing the research and compiling the data you need to make your appeal.
If you want to take the next step in the appeal process but would feel more secure with a professional in your corner, reach out to a Certified Tax Planner for expert guidance in lowering your tax bill.
