Seeing a Trend of Buildings being Sold for Less Than Your Property’s Assessed Value?

By Robert A. Hill, property tax attorney and president, Robert Hill Law, Ltd.

As an owner of one or more business properties, you or your team are likely watching the sales of buildings near to or adjacent to your property. I’d call that a “best practice” in business property ownership. But, a “red flag” is the sale of buildings near your property that don’t match the property tax assessor’s valuation of your property.

If you sold your property today and cannot get payment that matches its assessed value, you’re paying too much in property tax. Why not keep that money to hire those needed employees or begin that business-transforming initiative you believe necessary to remain competitive?

Where do you start? Find a property tax attorney team that can help you quickly and efficiently collect the hard facts to ensure you have a case. Look for a team that is scalable and prides itself in compromise, instead of costly litigation.

We can start you and I’d welcome your call. We’ve built a proprietary software system that quickly and efficiently provides the details to determine whether your perceptions are valid and whether a case is to be made. Since we work strictly on a contingency fee basis, there is no risk to you – only the reward that comes from a substantially reduced tax assessment in line with market principles.

Put a team of relentless advocates to work for you.

Property Tax Reduction Case Studies:

  • Big Box Home Hardware Retailer – $9 million in savings over three years
  • Big Box Pharmacy Retailer – $2 million in savings over four years
  • Minnesota-based Food Retailer – $3.7 million in savings over three years
  • Well-known Food Brand – $250,000 in annual savings

Author Bio:

Robert “Bob” Hill has, for over three decades, successfully represented major companies in property tax appeals through both negotiations with tax assessors and litigation. His dedication to his clients has helped businesses throughout the United States save tens of millions in property taxes. Mr. Hill has earned Martindale-Hubbell’s highest peer review rating of AV-Preeminent for his legal knowledge, communication skills, high ethical standards, and his representation of clients in significant property tax cases.

Now Automated – Property Tax Assessments for Business Property Owners

By Robert A. Hill, property tax attorney and president, Robert Hill Law, Ltd.

Your business property has just been assessed and marketplace knowledge tells you this tax assessment just doesn’t seem right. What to do next?

You need additional facts and you need them quickly. You want a simple means to efficiently find hard facts and determine whether there’s the leverage to save your business hundreds of thousands – or millions – of dollars over the next few years.

We’ve built a proprietary software that offers an unequaled property tax assessment analysis. It’s fast (often completed in minutes), collecting and presenting the facts to prepare a case against the assessor’s valuation. No other property tax firm in the United States has built anything like it.

After a short conversation, we only require a copy of your property tax statement. Results are often tabulated within minutes. To engage our team is simple. Contact us by phone at 952-426-7373, or via our Contact Form. Since we work strictly on a contingency fee basis, there is no risk to you – only the reward that comes from a substantially reduced tax assessment in line with market principles. Put a team of relentless advocates to work for you.

Property Tax Reduction Case Studies:

  • Big Box Home Hardware Retailer – $9 million in savings over three years
  • Big Box Pharmacy Retailer – $2 million in savings over four years
  • Minnesota-based Food Retailer – $3.7 million in savings over three years
  • Well-known Food Brand – $250,000 in annual savings

bobAuthor Bio:

Robert “Bob” Hill has, for over three decades, successfully represented major companies in property tax appeals through both negotiations with tax assessors and litigation. His dedication to his clients has helped businesses throughout the United States save tens of millions in property taxes. Mr. Hill has earned Martindale-Hubbell’s highest peer review rating of AV-Preeminent for his legal knowledge, communication skills, high ethical standards, and his representation of clients in significant property tax cases.

Robert Hill wins big case for Menards

In a seminal decision, the Minnesota Tax Court ruled that a Menards store located in Moorhead Minnesota had been overassesed by at least 4 million dollars for a number of years. Robert Hill Law, in conjunction with Paradigm Tax Group, successfully prosecuted a reduction of approximately 16 million dollars on behalf of Menards.

Robert Hill said, “Today’s ruling reflects our Tax Court’s recognition that big box retail stores are being overassessed in general because, unlike other types of retail facilities, they are not typically income producing and suffer from various forms of obsolescence. I’m pleased to have represented Menards in this important case.”

If you’d like to read the official Minnesota Tax Court opinion, or Bob’s brief for the case, follow the links below.

Read the official Minnesota Tax Court opinion

Read the Robert Hill Law brief

Prosecuted for Whistleblowing

Over three years ago, to redress their grievances in having been maliciously prosecuted as revenge for their whistleblowing activities, Lawrence and Sinuon Leiendecker (Leiendeckers) sued Asian Women United of Minnesota (AWUM), its board of directors (“BODs”) and a number of their constituents for various claims including malicious prosecution.  The Leiendeckers survived rule 12 motions to dismiss with the District Court ruling in October 2012 that: “Plaintiffs have alleged facts that would clearly and convincingly show that Defendants’ conduct constituted a tort, i.e. malicious prosecution, and so are not entitled to immunity under Minn. Stat. § 554.03 at this stage of the proceedings.” (Dist. Ct. Oct. 1 2012 Order/Mem. at 13-14.)

Significantly, the Court found that the Leiendeckers: (1) had sufficiently alleged facts that any of the probable cause determinations that may have been made by courts in the underlying actions “were not ‘proper’ because they were based upon knowingly misleading statements made by Defendants” (id. at 15) and, (2) had “clearly alleged that the Conversion Case and the Malpractice Case were subjectively motivated by bad faith”, (id.).  Considering that they clearly and convincingly pled factual circumstances showing that Defendants’ conduct constituted intentional torts, this would have been more than sufficient under normal circumstances for the Leiendeckers to proceed in seeking redress from the Court.

However, the Leiendeckers’ case is not being litigated under normal circumstances.  Instead, because the Leiendeckers’ well-pleaded claims against Defendants allege public participation abuses, the Leiendeckers are being deprived of having their grievances developed through the normal civil litigation process afforded to all other civil litigants.  This is what anti-SLAPP statutes do to honest litigants seeking redress of their grievances – it summarily punishes them prior to a determination of any wrongdoing; and even when they otherwise survive motions to dismiss under the established rules.

The this past August, the Leiendeckers moved the District Court to declare that Minnesota’s anti-SLAPP statute section 554.02 is unconstitutional, both facially and as applied because it: (1) is a content-based restriction of First Amendment activity; (2) is an unconstitutional prior restraint; (3) is not narrowly tailored to further a compelling government interest; (4) is facially overbroad; (5) violates equal protection rights; (6) violates the jury-trial right; and (7) violates separation of powers. The Leiendekcers’ pray that the unconstitutional citadel of the Minnesota anti-SLAPP law falls so that they may be treated just like everyone else that comes before the courts in this state seeking redress of their grievances.

If you are interested, please read the brief submitted to the court regarding this case.

***If you have any information regarding the claims made against any named (or unnamed) defendant in this legal action please contact: Robert Hill at bob@roberthilllaw.com or (952) 426-7373.

Thank You!

 

Real Estate Newsletter from Paradigm Tax Group

Here are 4 articles highlighted in the most recent issue of the Paradigm tax Group newsletter.

Ohio Supreme Court Rules: Grain Storage Bins Are Not Taxable As Real Property

  • An Ohio Supreme Court decision made earlier this month ruled that grain storage bins are personal property pursuant to state law and may not be taxed as real property. Read the full article.

Pennsylvania School Districts Target Apartment Complexes for ‘Spot’ Tax Assessment Appeals

  • Under current law, Pennsylvania school districts have the authority to pursue a tax assessment appeal on a property that they believe is under-assessed, called a ‘spot’ appeal. Because school districts don’t have the education funding they need, especially with rising pension costs, they are increasingly relying on the method in order to generate more money. Read the full article.

Legislators Push to Eliminate Prop 13 “Loophole”

  • Once again, California legislators are fighting a “loophole” in Proposition 13 that some believe allow commercial property buyers to avoid paying higher property taxes. Read the full article.

Study Shows Economic Benefit of 1031 Exchanges

  • In an effort to dissuade Congress from eliminating 1031 Like-Kind Exchanges, a stipulation under the U.S. tax code that allows an investor to exchange a business or investment asset for another that is similar and to defer all capital gains taxes, The Real Estate Roundtable has just come out in support of a new study detailing the benefits of retaining the provision and the negative consequences of eliminating it. Read the full article.

The Institute for Professionals in Taxation

The Institute, founded in 1976, is a non-profit educational association serving over 4400 members representing approximately 1450 corporations, firms, or taxpayers throughout the United States and Canada. It is the only professional organization that educates, certifies and establishes strict codes of conduct for state and local income, property and sales & use tax professionals who represent taxpayers (government officials or organizations do not qualify for membership). The Institute also provides excellent educational programs in Value Added Tax (VAT) and Credits & Incentives.

Sign up to become a member, and you’ll have access to news and information, articles, and details on events.

Visit them at ipt.org.

Big Box Store

Big-Box Stores: If You Build Them, Buyers Won’t Come

Update: Robert Hill wins for Menards.

“Big-box stores” have proven to be a very difficult valuation problem for many assessors over the past five years, as the temptation to assess them at estimated market values in line with smaller, income producing retail stores (or multi-tenant shopping centers), is often too great to pass up. The problem with this approach is that, unlike other types of retail properties, big box stores are not built to be income-producing real estate, and suffer from various forms of functional and economic obsolescence, practically from the moment the lights are turned on and the store opened.

Some general merchandisers, such as Menards and Mills Fleet Farm, have been in the big box retail market for a long time, and have experienced this market-based truth each time they decide to close a store and put it up for sale. Others, such as Target, Home Depot, Lowe’s, Wal-Mart, Costco, Office Depot, and Best Buy, are just beginning to experience this market-driven reality as they begin to close big box stores in favor of moving to smaller, more intimate spaces to attract customers whose tastes and standards are changing rapidly.

All of these national retailers have long understood that, at least originally, customers liked the idea of purchasing their building supplies, dry goods, home furnishings, and, in some cases, groceries, under one roof. Some, such as Best Buy, decided to offer a deep selection in a single category of merchandise. Either way, the convenience, accompanied by the lower retail prices the bulk warehouse-style sales concept afforded, caused consumers to abandon local retailers in favor of big box stores.

This trend dominated the retail landscape nation-wide for the better part of two decades. Then came the Great Recession, and perhaps more importantly, the convenience and affordability of switching to “on-line” shopping.

As consumer trends continued to evolve away from “one-stop shopping,” so too did the demand for big box stores. Consequently, these stores began closing at a rapid rate, and their “functional inutility” in the retail marketplace led to diminished pricing for the resale of the real estate itself: a seminal fact some assessors have been slow to acknowledge.

Moreover, reconfiguring these buildings for multi-tenant use is very costly, due to the need to redistribute central electrical and heating controls, restrooms, entryways, security systems, etc. This high cost of retrofit has left these properties with very few options in a resale scenario. They are not built to sell for continued use as retail centers, since they have no potential to become income-producing retail properties, and often are not in prime locations for an alternative highest & best use, such as distribution warehouse space.

Rather, they were built to generate an income stream by an AAA credit tenant. Hence, when they do sell, the sales prices invariably reflect a tremendous discount off of actual construction costs, which has been demonstrated multiple times in recent years through the fee simple sales of more than 50 Target, Lowe’s, Wal-Mart, Costco, Home Depot, and Menards stores, in locations nation-wide.

Given that the vast majority of these sales range from $20.00 to $25.00/sf., property tax practitioners are well-advised to alert their clients to the necessity of ensuring that the assessed value(s) of their clients’ big box stores must begin to reflect each of these market realities.

If you or your clients need help in this regard, please check out my website at www.Roberthilllaw.com, where you will find a recent authoritative article that addresses how to appraise big box stores in light of recent market trends, case law from states such as Michigan and Indiana where the issues associated with big box store functional and economic obsolescence already have been successfully litigated to reflect actual unit pricing for this property type, and perhaps most importantly, verified sales data illustrating why the Field of Dreams’ adage, “If you build it, they will come,” does not seem to apply to sales of big box stores; at least not if the smaller and more personal retail trends continue into the future.

Follow our company profile on LinkedIn for related news and updates.

Industrial building

Valuing Future Re-Development Sites

One of the more difficult problems property tax practitioners – and trial courts – face is to determine the fair market value of large industrial plants that are due to close and be torn down. Such properties rarely have much value to either their current owner(s) or for continued use by other industrial users. Often, the land beneath the improvements outstrips the value of the improvements themselves. Yet assessors still are required to value such teardowns according to their current highest and best use as of the Jan. 2 snapshot date, particularly when the time horizon involved in closing such plants often takes years to achieve.

Such was the problematic situation confronting the Minnesota Tax Court recently in Ford Motor Co. v. County of Ramsey. In an exhaustive opinion written by Chief Judge Delapena, the tax court ordered the value of the main Ford Motor Plant parcel located in St. Paul, Minnesota to be decreased by a total of $132.8 million and the real estate taxes adjusted accordingly. In its opinion, the tax court said it was tasked with determining the market value of Ford’s property on each of the valuation dates. The court noted that “Ford and the county have both concluded — and we agree — that [the] traditional valuation methods cannot be used to value the [property]. Briefly, there are no sufficiently comparable sales to examine; no one today would construct comparable improvements on the site; and the obsolete existing improvements would be of no interest to an investor.”

The court also said that it agreed with Ford and the county that the property today would have been purchased by a developer intending to raze the existing improvements, and that it needed to examine what price a developer would have been justified in paying for the property, given the cost of clearing and developing the lots. As viewed by the trial court, “An essential step in the development cost approach is the adoption of a reasonable development plan. Solely to value Ford’s property for tax purposes on the five valuation dates, we have adopted the county’s proposed development plan, which subdivides Ford’s property into 23 saleable lots, and which the county commissioned solely for this property tax litigation.”

The court found that Ford presented substantial evidence that the assessor’s estimated market value for the primary parcel of land was excessive for the five valuation dates in question, but that the tax assessor accurately estimated the market value of a different parcel on the property.

The court ordered the 2006 value on the primary parcel be decreased from $62.6 million to $33.9 million, the 2007 estimation be decreased from $74.5 million to $34.6 million, the 2008 value be altered from $60.5 million to $34.8 million, the 2009 value lowered from $43.5 million to $26.8 million and the 2010 estimation be decreased from $43.5 million to $21.7 million. The court affirmed the substantially lower estimated values for the parcel located in the River Corridor Overlay District: $2.4 million in 2006, 3.1 million in 2007 and 2.8 million in 2008-10.

Given the eventual outcome of this seminal case, the question becomes whether it is better to counsel clients owning obsolete industrial plants to consider the actual price they may achieve by selling their land for re-development versus continuing to treat their property tax assessments as the full value of the existing use? While the outcome in the Ford Motor case suggests the redevelopment alternative may be the preferred option, this outcome was mitigated somewhat by the fact that the plant was located on land in a desirable section of a major city.

Had the functionally obsolete plant been located in a small town, or on the outer edge of a suburb – places where land values are either stagnant or still in decline relative to the market for land in built-up urban core areas like St. Paul – the situation may have been drastically different for all concerned. Nonetheless, after the tax court’s decision in Ford Motor, taxpayers seeking to challenge the assessments of their rust bucket large industrial properties have an interesting alternative to consider, one that should be carefully examined by property tax practitioners and assessors alike. As the old adage says, “Be careful what you ask for; you just might get it.” In the case of Ford Motor Co. v. Ramsey County, truer words were never spoken.

Industrial Plant

Out-Of-State Comparables Value Large Industrial Plants

One of the most difficult challenges property tax practitioners face is to convince a particular state tribunal that relying upon comparable sales from other states is a proper method for determining the market value of large manufacturing plants. In McNeilus Truck & Mfg. v. County of Dodge, 705 N.W.2d 410, 414 (Minn. 2005), the Minnesota Supreme Court addressed this issue by stating that “the tax court’s de facto evidentiary rule barring out-of-state comparables violates the tax court’s obligation to assess property at market value.” The Minnesota Supreme Court thus reversed the tax court’s decision to ignore such sales, reasoning that the “market real buyers examine is not always limited by distance or location, nor by state lines. Such an arbitrary and artificial limit may not reflect market principles and creates grave risk of distorting property valuation.” Id. (emphasis added).

The property the Minnesota Tax Court assessed in the McNeilus case was a 650,000-plus square foot manufacturing/assembly plant located in Dodge Center, Minnesota. Given the fact there had been only one confirmed sale of a 500,000-plus square foot manufacturing plant in Minnesota in the decade prior to the 2001-2002 assessment dates under appeal, our expert had little choice but to include five sales of 500,000-plus square foot manufacturing facilities located in Illinois and Wisconsin in his sales comparison approach to value.

Not surprisingly, the county objected to the use of any of these out-of-state comparable sales, despite the fact that each of these manufacturing facilities bore many of the same physical characteristics and locational attributes as the subject, and, perhaps more importantly, despite the fact that each plant sold for prices that clearly reflected the sales price the McNeilus plant would likely have achieved if it were ever placed on the open market. The Minnesota Tax Court agreed with the county’s position that such sales were not relevant regardless of their similarity to the subject, and in the process created the de facto evidentiary rule prohibiting the use of comparable sales outside of Minnesota the Minnesota Supreme Court later rejected.

In rejecting such a per se exclusionary rule of market evidence, the McNeilus court recognized that “the appraiser must assess the actual market a hypothetical buyer of the subject property would look at, and consider comparable sales of properties in that market.” Id. at 413-414. The court pointed out that “a buyer searching for a distribution center to serve a national market for the buyer’s products might consider properties located in places as far apart as Denver and St. Louis as similarly situated …. Thus, what commentators have termed ‘economic proximity’ and not mere physical proximity, makes two pieces of real estate comparable.” Id. Since the tax court had failed to consider any of the economically proximate sales we offered to demonstrate the market value of the subject property, the Supreme Court remanded the case so that the tax court could exercise its “obligation to assess property at market value.” Id.

Following the Minnesota Supreme Court’s decision, the tax court was able to accept the principle that out-of-state sales do reflect actual market conditions for large manufacturing facilities, and that a prudent purchaser will not pay more for a property than it will cost to buy a similar substitute property, regardless of whether it’s located in Minnesota or in economic proximity to our state. As such, the single digit sale prices presented to the trial court did indicate what a prudent buyer would pay to purchase a parcel of real property that bears the same set of physical and geographic characteristics as the comparable sales. As a result, there was a 50 percent reduction in the client’s assessment; a significant market value reduction – and property tax savings – the owners of the McNeilus plant continue to enjoy to this day.

Talking Points – Sale-Leaseback & Market Value

In last month’s article, I attempted to show practitioners how to address the legal issues associated with proving that saleleaseback transactions cannot demonstrate the actual market value of the underlying real estate. Regardless of the case law, however, most assessors still want to consider such transactions as being relevant to the assessments of real estate encumbered by lease payments which are typically fixed to provide for amortization of the purchase price over the term of the lease plus a specified return rate on the buyer’s investment. To educate assessors as to why they must reject such sales, it is wise to arm yourselves with talking points demonstrating various reasons why the real estate is not the only thing involved in a sale-leaseback. I have found the following points to be helpful in my practice and wanted to devote this month’s article to sharing them with my colleagues.

Seller Advantages

Converts Equity into Cash. With a saleleaseback, the seller regains use of the capital that otherwise would be tied up in property ownership; at the same time, the seller retains possession and continued use of the property for the lease term.

Improves Balance Sheet and Credit Standing. In a sale-leaseback, the seller replaces a fixed asset (the real estate) with a current asset (the cash proceeds from the sale). If the lease is classified as an operating lease, the seller’s rent obligation usually is disclosed in a footnote to the balance sheet rather than as a liability. This results in an increase in the seller’s ratio of current assets to current liabilities, which often serves as an indicator of a borrower’s ability to service its short-term debt obligations. Thus, an increased current ratio improves the seller’s position for borrowing future additional funds.

Avoid Debt Restrictions. Businesses restricted from incurring additional debt by prior loan or bond agreements may be able to circumvent these limits by using a sale-leaseback. Rent payments under a sale-leaseback usually are not considered indebtedness for such purposes, thus a business can meet its cash needs through the sale-leaseback without violating any previous agreements.

Deduction of Rental Payments. A seller’s decision to raise funds through a sale-leaseback frequently is based on substantial income tax advantages. The main tax advantage of a valid sale-leaseback is that rental payments under the lease are fully deductible. With conventional mortgage financing, a borrower deducts interest and depreciation only. The rental deduction may exceed the depreciation in three cases: if the property consists primarily of a non-depreciable asset, such as land (although land is not depreciable, rental payments for the lease of land may be deducted); if the property has appreciated in value (while depreciation deductions are limited by the cost of the property, rental deductions may equal the fair market value of the property); or if the property has been fully depreciated.

Capital Gain-Ordinary Loss Treatment. Because the property involved in a sale-leaseback generally is held for use in the seller’s trade or business, it qualifies for capital gain-ordinary loss treatment. Under Section 1231 of the Internal Revenue Code, if the property is held for the long-term holding period, gain on the sale, with some exceptions, will be taxable as long-term capital gain to the extent that the gain exceeds the losses in the same year from the sale of other Section 1231 property. However, the gain will be taxable as ordinary income to the extent of recapture income. But in the case that the sale results in a loss, it will be deductible in full as an ordinary loss to the extent the loss exceeds Section 1231 gains from the sale of other property in the same year. This can be a substantial advantage to the seller in a sale-leaseback transaction.

Buyer Advantages

Higher Return Rate. The buyer usually receives a higher rate of return in a sale-leaseback than in a conventional loan arrangement. Also, the buyer may be able to circumvent state usury laws that limit the rate of interest charged with conventional financing. In addition, at the end of the lease term, the buyer receives the benefit of any appreciation in the value of the property. Finally, the buyer can leverage the purchase with mortgage financing; this may further magnify the return rate on the cash invested.

Ownership of the Reversion. The buyer owns the reversionary interest in the property. If the seller has an option to purchase or an option to renew the lease, this may limit or postpone the time that the buyer actually realizes the profit potential. The buyer also bears the risk that the property value actually might decline over the lease term.

Built-in Tenant. Finally, in purchasing the property, the buyer has a built-in tenant, namely the seller.

By using these talking points in your discussions with assessors, you may be able to convince them that the value of the brick and mortar should be determined by actual market sales of similar properties, not the investment value of business transactions in which the value of the real estate is often not even considered – much less relied upon – by the actual market participants.