Since 2008, we have all been affected by the “great recession” and a plummeting real estate market. As we experienced economic dominos knocking over companies and jobs, the residential market fell quickly followed by the industrial and commercial sectors. Now that we are seeing a slow but steady climb of the market and investment opportunities are returning, we can work to make up for the loss in the early 2000s and stabilize our financial futures by uncovering property tax savings through a property value assessment.
Property taxes have a significant financial impact on all taxpayers, including both the direct costs and the influence on a property’s bottom line. In all likelihood, unless a property tax appeal was filed in recent years, the market shift has left your property over assessed. This difference can result in you overpaying in property taxes. The attentive owner/investor can maximize property value by paying close watch to the property’s tax assessment.
Each property has an assessed value (50 percent of the assessor’s opinion of the market value) and a taxable value from which property taxes are calculated. Since the market dropped so rapidly, the purchase prices fell faster than the tax assessments. This is important, because Michigan’s property tax system is not wholly based on the real estate market. Because a property’s taxable value can only increase by an annual inflation rate a gap can occur between the assessed value and the taxable value. If the value of your property is less than twice the assessed value, it is over assessed. However, it is where the value is less than twice the taxable value that you will realize tax savings.
For example a property that is assessed at a market value of $5 million, but is actually worth $2 million should proceed with an appeal. The assessed value for the property would be placed at $2.5 million, instead of the more accurate $1 million. If the assessed and taxable values are equal, a successful appeal would reduce the taxable value by $1.5 million. At an average 50 mill tax rate, the reduction would provide $75,000 in tax savings for each tax year in the appeal. Moreover, the reduction would reset the assessment going forward, meaning the property would save that same $75,000 each year into the future. A successful property tax appeal is the sort of invaluable gift that keeps on giving.
With this year’s property values mailed out, owners should carefully review their assessment notices to determine if they qualify for tax savings. If the assessment does not reflect the property’s true valuation, the owner needs to consider appealing the assessor’s value. An appeal should review the following factors, any one of which may lead to a lower tax assessment and tax savings.
1. Review the property data listed on the assessor’s record card.
First, an owner should review the property data listed on the record card, such as the property’s age, total square footage, net leasable area or number of units can increase a property’s overall assessment. If there is a discrepancy in the information, the owner can correct this error by providing current information about the property.
2. Review how the assessed value was derived.
There are three approaches to valuing property: cost, income, and sales comparison. The assessor’s initial assessment generally derives the market value from a combination of the cost and sales comparison. This method uses a mass appraisal system that values numerous like-kind properties. Despite the amount of information in the public records, the cost approach is the least reliable. For example, if the property is several years old, it may be difficult to accurately determine depreciation and obsolescence factors. If it is new, the construction costs are invariably more than the property will sell for. Providing income and sales information to the assessor for a more accurate picture of the property’s valuation, can correct the valuation.
3. Review whether and how the assessor applied the income approach.
Once the appeal moves beyond the initial assessment, you need to determine if the property should be valued using the more accurate income and comparable sales approaches. If an assessor has employed the income approach, it is generally based on market-rent, vacancy, and expenses in order to arrive at a net operating income (NOI), which is then capitalized using a market
capitalization rate. Owners, however, calculate market value based on the actual income generated by the property. The differences between actual income and market factors often support a value reduction. Differences in rental rates, occupancy, tenant concessions, income and expenses may lead to revaluing the property.
4. Review how the assessor applied the sales comparison approach.
A proper assessment should also focus on the sales of comparable properties. Just as mentioned in reviewing the income approach above, it is important to ensure that the physical and economic differences between the comparable properties and the subject property are truly comparable. An owner can identify factors that influenced a buyer’s decision to purchase a property which the assessor may be unaware of, such as below-market financing, location in a city with a lower tax rate, or that the property was purchased at an above market rate by the in-place tenant. If the assessor is uninformed of such elements, he or she may incorrectly use a sale when the purchase factors show it is not comparable.
5. Review the benefits and costs of an appeal.
Whether or not to begin a property tax appeal requires a financial decision. Not only should potential tax savings be weighed against the time and costs associated with an appeal, but in our current market state there are important non-monetary benefits to consider as well. Even if an appeal does not reduce the taxable value and provide savings, lowering the assessment will make the property more attractive to a prospective purchaser and secure a better position for sale on the market.
The savvy-owner who understands the basis for their property tax assessments is in the best position to correct errors in the records and dispute the assessor’s valuation methodology to maximize a property tax reduction and enhance the property’s bottom line. Even with the rise in real estate activity, it is still an advantageous period for owners in all market sectors to evaluate their property tax assessments.
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Trey Brice is a partner at Jaffe Raitt Heuer & Weiss, P.C. and is the Practice Group Coordinator of the Property Tax Appeals Group. For any additional information or questions he may be reached at 248.51.3000 or tbrice@jaffelaw.com.
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