Help Your Business Clients Lower Property Tax Assessments
With cash-starved states and municipalities looking under every nook and cranny for revenue, manufacturers with lots of fixed assets and personal property generally take on the chin regarding their property tax assessments. So how can we help your business clients lower property tax assessments? In some states, commercial and industrial property owners typically pay inaccurate property tax levels by as much as 20% to 30%.
What Strategies Produce Tax Savings?
Many of your business clients, especially manufacturers, sense their assessments are too high. But most don’t have the time, resources, or expertise to challenge their assessment through the protest or appeal process before the deadline. And so, overpayments continue for another cycle and then again, and again and again. That is what assessors count on. But you owe it to your clients to keep your assessors accountable through available appeals and to avoid overpaying your taxes year after year.
Ask yourself the following question: “If my client put their property on the market on the assessment date, what kind of sale price could they expect assuming normal market exposure (i.e., listing time for a broker to sale) and typical consideration (i.e., cash or cash equivalent realized with the sale)? That should be a great starting point for determining whether your client is getting a fair shake on their assessed market value.
Here are three planning strategies that businesses have implemented successfully for tax savings in business:
- Appealing and reducing the assessor’s determination of market value.
- Leveraging unique classification errors for manufacturing-related fixturing.
- Taking advantage of pollution control exemptions.
Let us take them one at a time:
1. Appealing and reducing the assessor's determination of market value
If you and your client suspect their assessment is erroneous, filing your appeal well before the deadline and working on the process ASAP is essential. If you miss the deadline, you could be overpaying your property taxes for two more years because of how property taxes are invoiced in arrears.
Suppose you have your client’s case well-organized. In that case, you can usually talk with the assessor informally and sometimes bring a resolution to the appeal without having to initiate a formal protest that starts the county board appeal or state property assessment appeals board (PAAB) appeal process. That’s why it’s so important to get your ducks in a row first to build a solid case and hopefully avoid a lengthy path to resolving your appeal(s).
Once you and your client file an appeal, the local county or city board will schedule a hearing within a week or two of when you filed. If that sounds like a short window, you are correct. Your local and state government doesn’t want you to have too much time to prepare for your hearing. Most often, you’ll be filing with the state PAAB board to start the proceedings, as the local board process is not typically productive.
Manufacturers generally own industrial buildings, but if they have a headquarters, they also own or lease commercial office space. So, it’s all about accurately estimating that property’s fair market value (FMV). Granted, this can be a challenge, even for the most seasoned assessors and third-party appraisers.
Approaches To Assessment Valuation
Assessment practices generally favor the sales comparison approach to value. It’s one of the primary methods to appraise commercial property, as spelled out with statute and historical appeal decisions. The sales approach is based on what you could reasonably expect to sell your real property for on the open market. In other words, what would a willing buyer and willing seller agree to with no undue influence as of the assessment date in question? The problem with the sales comparison method is that if you own a unique property (i.e., food ingredient processor, asphalt production facility, grain elevator, other large industrial plants, etc.), there may not be enough comparable sales from which to determine your estimated market value. So, it may be better to rely on the cost or income approaches (see below).
The cost approach refers to the replacement or reproduction cost of the new item less market depreciation of the property. This value may or may not be the same, depending upon the age and design of your facility. Cost new can be readily determined by considering market surveys such as Marshall Valuation Service and/or recent construction costs of your property. However, extracting depreciation from market data can be tougher to estimate since there are specific appraisal technics for identifying and quantifying all three forms of market depreciation – physical, functional, and economic obsolescence.
The income approach refers to how much income you could reasonably expect to earn for leasing the real estate to others, less market-level vacancy and collection loss, and typical landlord expenses for operating the property such as repairs, utilities, management fees, administrative expense recovery, insurance, lease commissions to estimate net operating income (“I”). NOTE: comparable rents are typically evaluated and compared with actual rents to determine potential income).
Impact Of Local Property Tax Rate
Finally, the local property tax rate is added to a market-derived ratio of income to value or cap (“R”), and then this ratio is applied to the net operating income to estimate market value (“V”) with the following formula: I/R = V.
The cost approach and income approaches may be more reliable depending on the property type and availability of market data such as comparable sales, cap rates, vacancy, and comparable leases. However, courts generally favor the comparable sale comparison method, so cost and income are typically used to corroborate what the assessors come up with via the sales comparison method — or as a primary method for estimating value if sales are limited or non-existent for the specific market. Reconciling the three approaches is the last and most crucial step for estimating the overall market value of real estate.
Suppose your company owns a large food ingredient manufacturing building of 1 million square feet. I can assure you, there aren’t many facilities of that size in your state, much less many that have sold locally, regionally, or nationally. So, appraisers and assessors can possibly rely on developing a cost approach while expanding their search for sales of similar properties in other states to replicate typical buyer motivations and market rates for acquiring such a property. Unfortunately, national data is limited for this example property type. If identified, it would require in-depth research to ensure that business-going concern elements and other non-realty items (i.e., equipment, inventory, and other personal property) are isolated so only real estate influences are extracted from the transaction.
In summary, this type of analysis is highly complex. Moreover, a seasoned valuation expert must interpret and apply the data appropriately. So, don’t be a do-it-yourselfer here. Your client depends on you.
Other assessment relief strategies for manufacturers may also include reviewing their property tax roll for exempt property, such as pollution control property or business fixtures, which will be covered in the following discussion.
2. Leveraging unique classification errors for manufacturing-related fixturing
The Statewide Cooperative Case defines what was taxable vs. non-taxable in the state of Iowa, where many of JM Tax Advocates client firms are located. It came down to property that constituted integrated processing equipment – the property that should be classified as exempt personal property instead of real estate.
To identify and pinpoint the classification adjustments, you want to review your entire manufacturing process from beginning to end and determine which fixtures are integral to your manufacturing process and which fixtures generally serve as realty (i.e., paving, fencing, rail, etc.).
3. Environmental protection exemptions
Many states offer tax reductions through a lower assessment rate or through a complete exemption for certain property that contains, monitors, or otherwise lowers environmental emissions. In Iowa, for instance, the buildings and other properties that facilitate air or water pollution control will be permanently exempt and, thus, removed from the tax roll once certified by the Iowa Department of Natural Resources (DNR) through an annual filing. Limited opportunities are also available for resource recovery activities as well.
Suggested approach to maximize savings
We suggest utilizing a seasoned navigator who is familiar with your property type and your state’s appeals process to evaluate and document assessed value errors, proper classifications, and environmental protection exemptions. Of course, you can try to do the study yourself, but you’ll likely leave tax savings opportunities on the table and continue to overpay.
Here is what a typical work plan looks like:
- Review and evaluate property data.
- Evaluate initial assessment data and engage the assessor via the open book process.
- If needed, file local appeals.
- If needed, file state appeals.
- Complete environmental exemption applications.
- Post-certification, complete county exemption applications.
As you can see, there are several deadlines and filings to consider with a property tax evaluation plan. In addition, the deadlines and filings become even more complex at the state PAAB level, where discovery rules typically apply. For these reasons, we recommend bringing in the experience!
If the assessor gets your client’s assessment wrong, they could be overpaying by hundreds of thousands of dollars a year – even millions — for several more years. Just remember that challenging an assessment and building a case on a tight deadline can be stressful and complex. So do not go at it alone. Instead, let an expert help your company navigate the property tax review and protest process, so you can return to doing what you do best – running and growing your business.
- Don’t assume your client’s assessment is correct, especially if they own a limited market (specialized) property.
- Manufacturers pay some of the highest property taxes in the nation.
- Act well before the appeal deadline to optimize your chance for relief.
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Some of the ideas in this article came from Josh Malancuk, CPA, CMI, is President of JM Tax Advocates, a service organization that advocates for property tax reductions and maximum level incentives for leading Midwest manufacturers. He brings 28 years of specialized knowledge and experience to his clients. In addition, JM Tax Advocates currently serve on ABI’s tax committee to provide input and collaborate on tax legislation. You can contact Josh directly at email@example.com or 317.674.8390 x 100.