Assessment Appeal Methods
How We Do What We Do…
As the saying goes, “there is no substitute for experience.” There are no books to teach the “ins and outs” of each government agency and jurisdiction when it comes to the handling of assessment appeals. It is only through hands-on experience that we have learned the unique preferences of each agency and the people who staff them. Nonetheless, there are laws that protect taxpayers from arbitrary assessments and there are certain recognized methods for the valuation of property. The approach chosen to contest an assessment depends mainly on the type of real estate.
Income Producing Property (Commercial offices, Industrial buildings, Stores and Apartment Buildings)
These are discussed in the following “primer” on property tax appeals:
Property that may be purchased for the rental income it produces may generally be valued using the so-called “Income Approach.” This approach applies to most apartment buildings, office buildings, retail stores and industrial property. While there are some differences in the details depending on the property type, the basic principle is the same — capitalization of the net income to calculate property value.
Most commonly, the annual potential gross income is determined from current leases. An appropriate percentage of that income is deducted to allow for the risk of vacancy and collection losses. Annual expenses are subtracted to produce the net income. Finally, the net income is divided by a capitalization rate to determine the market value. The capitalization rate represents the percentage return on a real estate investment and reflects the cost of financing.
“The Devil is in the details.” When the Income Approach is used for purposes of property tax assessments, the property taxes may not be included as an expense. Instead, a “tax load” is added to the capitalization rate. The “tax load” is the product of the level of assessment, equalization factor and tax rate. Whether a “tax load” may be applied depends on whether leases are gross or net. Finally, the government may not accept the Income Approach if it is based on actual income and expenses that vary substantially from market rates. The same is true if the landlord and tenant share common ownership. In such cases, the lease is not at “arm’s-length” because rental rates can be manipulated by the owner and do not reflect market forces.
We know from experience how each jurisdiction applies the Income Approach to valuation so that we can tailor our appeals to meet the expectations of each government agency. Our access to market information through database programs like CoStar provides us with information pertinent to any particular area so that we can back up our analysis with hard evidence. We know when and how to make the Income Approach work for our clients.
Income Capitalization can only be used to calculate the value of income producing property when there is no relationship between the landlord and tenant and rental rates are determined by market forces (i.e., supply and demand). Of course, if the property owner occupies the real estate, then the Income Approach cannot be used. This is true even if separate companies own and occupy the real estate, so long as the companies have common ownership. In such circumstances, property valuation typically depends on traditional research of comparable sales. Explanation of the Comparable Sales Approach to property valuation may be found in our discussion about assessment appeals of “Single-Family Homes.”
Like single-family homes, condominiums are valued by comparable sales of similar condominium units. Oftentimes, the new buyer of a condominium unit will appeal the assessment using the purchase price of his or her unit to show its current value. (Assuming that the purchase price is lower than the assessor’s valuation, of course.) Such “piecemeal” adjustments in assessment, however, may result in a lack of uniformity in the assessments of similar units in the condominium building. It is best to appeal the assessments of all of the condominium units so that the assessor or Board of Review can ensure uniformity or proportionality in the assessments of all units.
The relative values of condominium units is determined by the condominium declaration, which includes an itemized list of the percentage ownership interest of each condominium unit in the common elements. If two units each own 5% of the common elements, then their assessments should be the same. So, once the value of particular unit types is determined by comparable sales, the relative values must be calculated consistent with the condominium declaration. The methods used by the various county Boards of Review differ, but some form of calculations are used to ensure proportionality.
There are two principal ways to appeal the assessment of a single family home: lack of uniformity of assessment and market value.
Lack of Uniformity of Assessment
Article IX of the Illinois Constitution makes it the right of every property owner to be treated equitably. In other words, if two homes are the much the same in age, style, and size, they should be assessed consistently. This concept is referred to as uniformity of assessment. This right to uniformity of assessment has nothing to do with market value. So, even if the assessor has placed the correct value on your home, he may not make your assessment higher than that of comparable homes. Everyone is entitled to equal treatment. If research shows that the assessment of your home is higher than similar homes, then your assessment should be reduced to match the others even if the assessor’s valuation of your home is correct. Of course, similar homes usually fall within a range of assessed values, so several examples of comparable homes with lower assessments must be offered as evidence. Finally, you must ensure that you are not “comparing apples to oranges.” So, when presenting evidence of a lack of uniformity, the assessed value of the land must be subtracted and the comparison drawn between only the improvements (i.e., the buildings).
Assessed value is just a percentage of the actual cash value or market value of your home. In Cook County, the assessed value of residential real estate is 10% of market value (commercial property is assessed at 25% of market value). Everywhere else in the state, the assessed value is one-third or 33% of market value. So, if the assessor thinks your home is worth more than the price for which you could really sell it, then the assessment should be reduced to a percentage of the true market value.
Market value of residential property is typically determined by sales prices of comparable homes. This is the way that a realtor determines the asking price when you put your home up for sale. It is also the way that an appraiser determines the market value for a bank when you apply for a loan. Researchers, like our own team of analysts, look for recent sales of comparable homes in your neighborhood. This is typically done using the Multiple Listing Service (“MLS”), which keeps records of sales as well as listings. The key is making adjustments for differences in features. For example, a comparable home may be a little larger or may have fewer bathrooms. Knowledgeable analysts will make adjustments to the sale price of the comparable home (i.e., reduce or increase value) to allow for such differences. The adjusted prices should then reflect the correct value of your home.
Determination of market value is based on research of comparable sales. So, even if you find a superior home (e.g., larger living area, newer and/or more land) and the other home sold for less than the value that the assessor put on your property, the other home is not a proper subject for comparison, because it is not comparable. Similarly, listing or asking prices for homes are less meaningful than actual sale prices.