Know your tax assessment rights: What we can all learn from Pennsylvania
Jun 2, 2015
Typically, property owners are the ones appealing their taxes and assessments in hopes of reducing their tax bill. But recently, Pennsylvania government entities with taxing authority – mainly school districts in a few counties – are appealing the assessments of commercial properties for the opposite reason, arguing they’re too low and the properties in question are undertaxed.
The largest chunk of a local property tax bill often comes from the schools’ tax levy. In many cases, school districts have successfully argued that the assessments of recently bought and sold properties are well below their market price, and therefore should be raised – which increases the total tax bill and the school’s tax revenue.
But that’s a troubling sign for property owners. As such, appraisers, real estate professionals, and property owners should know the legal basis for fair taxation, and how these new assessments could impact tax bills in the future.
Understanding the Uniformity Clause and spot assessments
In each Pennsylvania county, the Board of Assessment sets current market real estate values. Pennsylvania law prohibits what are known as spot assessments, the reassessment of a property that’s not conducted as part of the county-wide reassessment.
Even after the sale of a property, assessments cannot be raised. For example, if a property is assessed at $20 million, and it sells for $60 million, the assessment remains the same, and the Board of Assessment cannot reassess the property.
There’s one exception to this law, and that’s in the case of major property modifications, such as a renovation or addition. Because such a substantial improvement can greatly increase a property’s value, the Board of Assessment can reassess the property. In these instances, county officials know a renovation is occurring based on construction estimates provided for local permits. A major renovation notwithstanding, the county cannot single out a property and increase its assessment.
In recent years, school districts have filed tax appeals throughout Pennsylvania’s Montgomery and Chester counties, arguing that an individual commercial property’s assessment is too low, and does not reflect its true value. Many property owners, real estate professionals, and appraisers argue these are spot assessments in disguise.
The Uniformity Clause in the Pennsylvania Constitution states that all properties of a particular type must be taxed uniformly. Appraisers believe these appeals violate the clause because they single out one property, not an entire class. However, the courts have sided with the taxing entity, and permitted the increased assessment of these properties.
What appraisers can do
Though the courts have ruled these appeals are permissible, the final resolution to this problem isn’t settled just yet, as Harrisburg continues to debate legislation and property owners continue to argue against these appeals and higher tax bills.
Today, appraisers and real estate participants like buyers and sellers are underwriting the possibility of an assessment increase by using the cap rate to calculate an implied value, and deriving an estimated real estate tax from that new implied value. This method is critical during property sales, and we make these calculations to show new owners a clear picture of what the tax bill may be. This method avoids the sticker shock of a revised tax bill if a property is appealed and the assessment is increased.
Properties can still be compared in a peer analysis using recent comparable sales which provide material benchmarks after analysis. However, the complexities and comparison from all this data is well suited for an appraiser who has the data and critical locational, physical, and economic differences between the comparables and the subject property at their fingertips. An analysis of an appropriate risk-adjusted return rather than simply price per unit or per square foot, emulates investors’ forecast of risk vs. return for income producing properties. As such, the appraisers’ analysis of an appropriate capitalization rate reflects the appropriate measure for this valuation question.
Posted by: Michael Silverman
