Editor: Howard Wagner, CPA
Property tax, or ad valorem taxation, is the one tax based on an opinion, i.e., an opinion of value. Thus, property tax can be very subjective when unusual and special circumstances have affected properties. The COVID-19 pandemic has had a well-documented effect on both real estate and business personal property values and was a transformative event during 2020. The COVID-19-related downturn and its impact on commercial property values offers a one-time opportunity to claim favorable valuations on returns as they are filed or to challenge valuations from state taxing authorities.
Certain industries and properties were first shut down due to health concerns. As shutdowns continued, they produced permanent changes in the way many industries conduct business. Some industries do not know if they will ever bounce back to pre-pandemic levels, while others have hit new highs. Distribution warehousing, trucking transportation, medical research, sanitizing products, home goods industries, online shopping, and online entertainment and gaming, as well as other industries, all saw significant increases in business. However, other industries were negatively impacted due to decreases in demand, such as office space rental; brick-and-mortar retailers and shopping malls; hospitality and entertainment venues; cruise ships; commercial airlines; and many more.
Tax assessors must value and assess a large number of properties as of a given date. They use mass appraisal techniques. These techniques do not typically take into account special circumstances such as economic and functional obsolescence, unless those factors are presented to assessors by the property owner. Thus, issues such as overstocked inventory, reduced office space demand, decreased demand for manufacturing facilities, a glut of restaurant and retail equipment on the market, and many other issues will not be reflected in the tax assessments via reduced valuation unless the property owner takes proactive action.
How to present property valuation issues
Being proactive with tax assessors is the most effective method of presenting issues for reducing values. The assessors have a tremendous amount of leeway regarding valuation before a notice of assessment is sent. But once the notice exists, the local jurisdictions such as counties, cities, and school districts have an initial indication of what the property is worth. The assessor must then defend and thoroughly document any changes. Protests and appeals are the standard operating procedure for remedy, although they are not nearly as effective as notifying assessors early in the process when they can truly use their judgment to reduce assessments.
Notifying the assessors of issues can be accomplished in a variety of methods. The method that is best for your company depends on your specific circumstance. However, documents your company should always provide assessors include the request for reduction, a summary of the issue, and a quantification or calculation of the reduction amount.
As stated above, the delivery method can vary. The discussion below outlines the various options that may be available, and businesses should check the specific requirements of each jurisdiction to determine which methods are appropriate. There are typically five methods of proactively raising a valuation issue with the assessor, as follows:
Issue letter: This is a one- or two-page letter that describes the situation at a very high level and often requests a percentage of reduction for additional depreciation. This is commonly used for a large number of multi-location assets or leased property. An example may be where a computer system was deployed across the country, and a new less expensive system with better capacity and capabilities is now being deployed. In the right situation, the result can be a simple calculation of replacement cost to provide an adjustment to quantify obsolescence. It is also very cost-effective to simply include a standardized letter with each business personal property return.
High-level value analysis: This is usually a five- to 10-page valuation that includes the reduction request, a summary of one or more issues, and quantification calculations for more than one issue or more than one class of property, e.g., inventory and certain machinery. It may also contain more than one approach to value such as the cost approach, sales comparison approach, income approach, and/or equity analysis. This method of notifying an assessor of an issue can be used for real estate, business personal property at manufacturing facilities, telecom systems, and other complex properties.
Detailed value analysis: This method contains all the calculations and details of a limited-scope appraisal. These can be from 25 to 75 pages. However, a detailed value analysis is not a signed appraisal. Instead, it is produced by an in-house industry professional or a property tax consultant, who are advocates for the company. The report will summarize and go into some detail on each issue as well as consider all approaches to value. These analyses are produced for large-dollar facilities and real estate, business personal property for large manufacturing facilities, and other complex properties such as telecom, utility, transportation, and other centrally/state-assessed properties.
Uniform Standards of Professional Appraisal Practice (USPAP) appraisals: As a tool for being proactive, signed professional appraisals are more commonly used for nonproperty tax reasons such as mergers or acquisitions. As proactive documentation, these full-blown appraisals are most often acquired when there have been issues with an assessor's valuation or board ruling and when there is a significant amount of property tax on property that has had issues. Many businesses are currently using USPAP appraisals for downtown office buildings that have suffered significant economic obsolescence.
Person-to-person contact: The last and maybe most important method of proactively raising a valuation issue is picking up the phone, setting up a meeting, or at the very least sending an email to the assessor instead of only submitting the documentation above. On any item of significance, it is recommended that a phone call be placed to let the assessor know you are sending additional documentation that you would like to have considered. Also, it is always good to let the assessor know that if the documentation is not fully acceptable, you would like the opportunity to discuss the issues and valuation whether via teleconference or in person.
Many companies had issues due to the pandemic. Because many businesses were merely focused on surviving COVID-19, they may not have had resources available to request reductions in property tax liabilities that may have been available to them. The remedy may be easier than many are aware if the business proactively works with the assessors. Assessors are very aware of the issues with COVID-19; in most cases, it is only a matter of quantifying the reduction request and presenting how this issue affected your company's assets. This is the time to be proactive.
Howard Wagner, CPA, is a partner with Crowe LLP in Louisville, Ky.
For additional information about these items, contact Mr. Wagner at 502-420-4567 or firstname.lastname@example.org.
Contributors are members of or associated with Crowe LLP.