Property Tax Reduction News


Sean P. Keegan, EVP & Principal
Fall 2010

Considering the Income Approach to value.

icon_4We have witnessed dramatic changes in California real property values during 2009 & 2010. As asset managers, property managers, owner users, and institutions look for ways to reduce costs, the annual review of property tax liabilities may provide tax savings opportunities. This tax liability is based on the Assessor’s Property Value which is then multiplied by the tax rate (CA – estimated at 1.1%). For the 2010/2011 Tax Year, tax bills will start to be issued in October.

In the County Assessor’s Office, the Real Property Division has already issued their 2010/2011 values for land and improvements. They will review assessments as they are appealed. For properties built or acquired during the period of 2004 through 2008, it is probable that the property values have decreased compared to the County enrolled values. The 2010/2011 county values may not reflect a value decrease which is contrary to the real estate market downturn during 2008-2010. The Assessor’s Office will be challenged with the 2009/2010 & the 2010/2011 Appeals due to the fact that for many property types there have been a low number of property sales to provide meaningful sales comparables. This affects our ability to have any meaningful rates derived from these sales (OAR-Overall Rates).

It is important to determine whether the Assessor knows the facts, any limitations to the income (i.e. restrictions, expensive renovations, demand due to newer projects nearby, age, functional obsolescence, or the expected changes associated with your property). We believe that the subject property income and the income approach may be more accurate in valuing your property than trying to find sales comparables.

For the income approach to value, if the Assessor is relying primarily on leasing information (rent roll report) as contracted without making adjustments where the taxpayer is providing several months of free rent to retain a tenant due to current market conditions, then the resulting value estimates will require adjustment. Also, actual vacancy and collections may differ from the Assessor’s estimates.

The California Code of Regulations outlines in Rule 8(a), the Income Approach to Value is “used in conjunction with other approaches when the property under appraisal is typically purchased in anticipation of a money income …” The Assessor’s Handbook (AH) 501 states “[T]he income used in rate derivation must be the investor’s anticipated income, because the decision to invest in property is directly related to its anticipated return.” If the anticipated income is not reasonably accurate for the subject property or a comparable property, it can create a flawed value result. “In direct capitalization, only the next year’s income is forecasted.” (Advanced Appraisal, AH Section 502, P. 67) However it is beneficial when subject property information is available for two years, currently we do know that rents have decreased and the net operating income may have decreased. It helps in countering the county appraiser’s forecasts. This is possible since assessment appeals are not calendared for hearing for more than a year.

In our opinion, the income approach to value provides opportunities for value reductions on properties since real value estimates may be made for the subject property. If the reduction in value is processed and the taxes have been paid, then a refund will be issued. These monies may provide a reduction to operating expenses for the owner-user or these efforts by the landlord create value to the property tenant. To protect your rights for many of the California counties, we will need to file the Assessment Appeal Application by 11/30/10 on your behalf.

Tags: Real Estate Property Tax Reduction, Reducing Property Taxes, California, Nevada, Oregon, Utah, Arizona, Property Tax Relief Assistance