Know the top five most common commercial property tax errors and how to correct them.
By Jenna Reyes, Director of Real Estate, Property Valuation Services
As experts in property tax consulting, Property Valuation Services has extensive experience identifying errors made by the local tax assessor on commercial real estate parcels, both in their property records and in the valuation of land, buildings and improvements. Identifying, quantifying and correcting these errors can help taxpayers reduce their property’s valuation, lowering their tax liability. Below we detail the top five most common commercial property tax errors we experience in representing our clients and the industries in which these errors occur most often.
- Misclassification: Assessors often classify a property as “commercial” when it should be classed as “residential”. Various building types and usages qualify for a residential classification, depending on the jurisdiction’s statutes, the building’s use, occupancy length and type. Property classification can impact the valuation of the property, the percentage of assessment that is taxable, and the tax rate applied. Property Valuation Services knows how to confirm a property is classed accurately in county assessment records, how to request a change in class, including appeal procedures, and even how to obtain a split commercial/residential classification, for properties such as rehab facilities, hotels and more.
- Property Characteristic Errors: Local tax assessors must keep detail on various aspects of every property, including total building square footage, construction-grade and quality, interior buildout components, site improvements, zoning and more. With the use of computerized mass appraisal systems and understaffed assessment offices, their records commonly contain errors. PVS is skilled in reviewing county record cards, GIS programs, and conducting site tours to identify and correct these errors, which can have a significant impact on a property’s value. Some jurisdictions’ statutes also allow for corrections to be made in prior tax years, resulting in additional tax savings for property owners.
- Incorrect Valuation Approach: There are three accepted methodologies to value commercial real estate: the cost approach, income approach, and sales comparison approach. Tax assessors commonly use the wrong one for specific property types. Many assessors use a mass appraisal technique or software rather than valuing each property individually based on ownership, property function and age, and the local market. Special use and complex properties that are constructed by or for a specific owner/operator and for a single-use experience their own forms of obsolescence, accelerated depreciation, and vacancy issues. County assessors are required to appraise all residential, commercial and industrial properties in their jurisdiction, and rarely have the expertise to properly value these special subjects. They also tend to “chase a sale”, setting a property’s assessment at its most recent sale price, which may include business personal property and business value, may not be an arms-length transaction, or may include influencing financial factors.
- Unequitable Assessments. Most states require the local tax assessor to value all similar type properties equally and uniformly, accounting for differences in size, age, and location. In reality, this is not always the case. PVS often discovers varying valuation methodologies being applied across the same property type, a lack of or inaccurate adjustments being applied in their comparison models, or assessors choosing only certain properties for comparison, leading to unfair assessments for other owners. In certain states, an equity argument is the only one needed to pursue an appeal, even if the assigned market value of the property is fair. Knowing how to collect, adjust and present comparables in an equity argument can lead to significant tax savings for property owners.
- Double taxation between real estate and personal property. Various physical components of a commercial building are included in the value of the real estate according to appraisal practice, yet PVS consistently discovers those features being taxed as tangible assets on the property’s business personal property account in states around the county. Common offenders include interior finishes, cabinetry, countertops and sinks, fire alarm systems, HVAC and electrical upgrades, and generator switches, and any time a building permit is submitted. This is double taxation and requires an appeal to the local tax assessor to remove the non-taxable real estate items from the tangible equipment account. Building renovations and new construction are also a source of double taxation, with the assessor increasing the commercial real estate’s assessment for an owner/landlord, while also adding leasehold improvements to the business personal property account of the tenant(s). Knowing how to review the real estate assessment for market value fairness and how to properly classify assets when filing a personal property tax return are paramount to avoiding double taxation, and in a way that passes audit inspection. PVS has extensive experience, housing a department for each kind of tax, and a skilled audit team to reduce assessments and be sure taxpayers reap the benefits into the future.
Local tax assessors are tasked with valuing all real property in the city, town or county, and mistakes are bound to happen. The burden to correct these mistakes falls on the owner. Taxpayers should consistently review their commercial property tax assessments for accuracy and to be sure they’re fairly taxed compared to others in the market. Contracting with a firm like Property Valuation Services, who has appraisal staff and tax expertise, can significantly increase your chances of a value reduction. If your property hasn’t been reviewed lately or you have concerns, contact our office for a review.
About Jenna Reyes, Director of Real Estate with Property Valuation Services
Jenna Reyes has extensive experience in the valuation of hospitals and complex health care properties, including psychiatric, oncology, surgical and dialysis centers, as well as hotels, apartments, retail, offices and other commercial real and personal property types. Jenna has presented and testified to property valuation at local, state and litigation hearings across the U.S. She has worked on local property tax credit and incentive agreements in multiple states, and has extensive experience in forecasting for acquisitions and tax planning for multi-million-dollar projects.