What you need to know to successfully appeal your inordinate property taxes.
By Stewart Mandell, Honigman Miller Schwartz and Cohn LLP
For some time, owners and operators of seniors housing properties have been aware of the staggering demographic statistics, such as the Census Bureau’s projection that the senior population will exceed 61 million when the youngest boomers reach 65 in 2029. This is truly the “Silver Tsunami,” as it’s well known in seniors housing circles.
Yet, even seniors housing professionals may be surprised by excessive property tax assessments that break otherwise carefully constructed budgets.
Why do some taxpayers receive such unwelcome notifications? Factors include the increasing number and variety of seniors housing projects, coupled with the mass-appraisal methods that assessors typically employ.
With tens of thousands of units constructed each year, the country now has over 3 million seniors housing units ranging from independent living to assisted living, memory care and/or nursing care. Appropriate assessment methods depend on whether a property is an all-encompassing continuing care retirement community; freestanding with only one component (such as independent living only); or comprising several (but not all) of these subtypes.
Unfortunately, assessors with limited resources usually use a cost-based methodology that is cost-effective for valuing a large number of properties. That may work for residential assessments in areas with similar homes, but given the significant differences between seniors housing properties, this approach can create an enormous problem for taxpayers who own seniors housing.
An outrageous assessment
In one recent case, the owner of a newly constructed property was shocked to receive an assessment valuing the property about 30 percent above its actual cost. The resulting taxes would have exceeded the owner’s budget by over $250,000, not only ruining cash flow, but also destroying more than $2 million of market value.
Fortunately, there are measures taxpayers can take to counter excessive assessments.
A critical initial step is to confirm any appeal deadline. Not only do rules differ across the country, but in many states the appeal deadline depends on when the notice is sent.
Further complicating this point is that more than one formal appeal may need to be filed, and taxpayers often have a narrow window within which to file. Generally, if a taxpayer receives a notice and misses a required appeal deadline, there are no second chances for that tax year.
Other important steps are to determine the applicable value standard and the assessment’s basis. Usually (but not always) the standard will be market value, or the probable cash-equivalent price the property would fetch if buyer and seller are knowledgeable and acting freely. To determine that value, the assessor usually will have used an incomplete and improper cost approach that only adjusted for physical depreciation.
For these typical cases where the assessor has estimated market value using a flawed cost approach, drilling down deep into the assessor’s cost methodology may produce a gusher of tax savings.
In the aforementioned case, the assessor had used the costs for constructing a very expensive skilled nursing facility. Correctly using the assessor’s cost estimator service for the subject property, which was mostly comprised of independent living units, reduced the cost by about $10 million.
Additionally, an assessor’s cost-based valuation often will only account for depreciation from the property’s physical condition. A proper cost approach must also account for any functional or external obsolescence.
Functional obsolescence can be substantial, especially for older properties, because consumer preferences change over time. What consumers may have desired years ago may now constitute a poor offering.
External obsolescence, which is often due to adverse economic conditions, can impact a property regardless of its age. For example, there will be external obsolescence if new properties overwhelm market demand in an area, or if the inevitable next economic downturn lowers market values.
While atypical, sometimes assessors will use an income approach or sales comparison approach to value seniors housing properties. As with the cost approach, the income/sales tactics introduce many ways for assessors to reach erroneous and excessive value conclusions. One potentially large error is valuing the entire business and failing to remove the value attributable to services, intangibles or personal property.
In the previously mentioned case, the taxpayer’s appraiser used the income approach and concluded that the seniors housing property had a total business value of approximately $22 million. The appraiser then determined that about $1 million of that value was attributable to services and intangibles and about $800,000 was attributable to tangible personal property as shown in the table below.
Market Value of Total Business Assets
Less Tangible Personal Property
Less Services and Intangibles
Market Value of real property
In a similar vein, the Ohio Supreme Court recently reversed the Ohio Board of Tax Appeals in the case of a nursing home property where an appraiser had determined that only about 62 percent of the total paid for all assets was for the real property. The Board of Tax Appeals had summarily rejected the appraiser’s analysis as a matter of principle. The Ohio Supreme Court reversed and ordered the board to reconsider the appraiser’s analysis, and determine what amount, if any, should be allocated to items other than real estate.
These cases underscore that an assessor who uses the income or sales comparison approach and mistakenly values the entire business, rather than the real property alone, can improperly inflate a real property assessment by a material amount.
Another step taxpayers can take to achieve tax justice is to involve experienced tax professionals and appraisers. As the above analysis shows, property tax valuation appeals have many procedural nuances as well as legal and factual issues that must be addressed. In addition, in some jurisdictions there may be a basis to obtain relief based on the assessments of comparable properties.
As the inevitable Silver Tsunami inundates markets, there will be more seniors housing properties and more instances of excessive tax assessments. To the extent that the surge in the elderly population depletes local government finances, whether due to government pension plan shortfalls or otherwise, there should be no surprise if property tax bills increase.
The owners and operators of seniors housing properties will need to carefully monitor their property tax assessments and remain vigilant to avoid painful and excessive taxation.
Stewart Mandell is a partner and leader of the Tax Appeals Practice Group at law firm Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel, the national affiliation of property tax attorneys.