A Taxing Situation

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A few months ago, most property owners received a letter from their county auditor that revealed their new 2015 re-assessment. Every six years, the Ohio Revised Code requires each county to reappraise all of their respective taxing parcels. These reappraisals are updated every three years, a triennial update. In 2015, all of the parcels in Cuyahoga, Lake, Lorain and Portage counties were updated. Mistakes can sometimes happen, especially considering these four counties include the re-assessment of approximately 800,000 parcels. In this month’s column, we are going to discuss some nuances associated with the appeal process, as not every property owner may agree with the new value that was determined as a result of this re-assessment.

Considering most of the readers of this column are likely to be very familiar with the legal aspects of a tax appeal, the focus of this column will be on real estate related aspects. These generally fall into a few categories – true market value, timing and sale comparables being among the primary topics.

True Market Value (Valuation)

These days, it is commonplace for the property owner and the taxing district to each engage the services of a real estate professional to provide an appraisal or opinion of value for a property. There are many different types of value, but for taxing purposes, the goal is to determine the true market value. This is the price that a property would achieve in a competitive and open market under all conditions associated with a fair sale. Although this seems straight forward to determine, for many properties it can be anything but. For example, suppose a property is located at a very busy intersection in a desirable community. It includes a small, older building occupied by a barber shop situated on a two-acre lot. The property was valued at $200,000 but upon re-assessment, the new value is estimated to be four times greater than the former value. Further, assume that one of the properties located at the opposite corner has a similar size lot and transferred within the last couple years. The existing structure was torn down and replaced with a new drug store and the transfer price for that parcel was $1.5 million. This is a classic example of a dramatic difference between value-in-use and true market value. There is no way that a small, older barber shop could quadruple in value. However, the market data certainly suggests that the value of the underlying real estate has clearly increased. That is the goal of an appraisal or opinion of value – to determine the true market value.

Timing

As we know, the appeal process can sometimes drag out over a period of months, if not years. So it’s important to remember that the value should not only represent the true market value, but also represent that market value at the time of the re-assessment. Many factors, both micro and macro, can influence real estate values and all of these factors are dynamic and apt to change quickly in a short period of time. This is important to remember as the 2015 re-assessment valuation appeals stretch out into 2017 and 2018. It’s wise to archive current information, such as vacancy rates, asking lease rates, recent lease transactions and absorption rates just in case this type of information is needed at some point in the future.

Sale Comparables (Comps)

Comps are a very common way to help establish the true market value for a subject property. However, using this approach can be one of those part art, part science propositions. The science part is easy as any real estate transfer is a matter of public record and typically includes price and transfer date. The art part can be a much different story. The key is understanding all of the details associated with each comp. For example, one comp might show a shopping center that recently sold for $140 per square foot and another comp might show a shopping center right across the street that also recently sold, but for $40 per square foot. It is critical to understand all of the details associated with each comp, as the higher comp might represent a property that is fully leased to high-credit, desirable tenants and has great visibility to the street. Meanwhile, the lower comp might represent a property that is largely vacant and is situated at the bottom of a steep slope, which hinders its visibility from the street. Knowing the tale of the sale is a very important part of developing the true market value.

Tony Vain Investigations

March 31, 2016

One last component that is absolutely critical is actually a date. This is the last day that a property owner can file an appeal. As most of you know, an appeal for a residential property can be filed by the owner, but any appeals for a commercial property must be filed by an attorney on behalf of the owner. Keep in mind that the date the appeal letter is postmarked is the key, not the date it is received. It must be postmarked no later than March 31, 2016 in order to be considered an appeal of the 2015 valuation. Ira Krumholz CPM

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