In an economic downturn the owners of commercial real estate must “tighten their belts” and look for every possible way to reduce expenses. One way to substantially reduce expenses is to consider a real estate tax appeal.
Commercial real estate is taxed based upon the assessed value of the property. Taxes are established by a simple formula; the assessed value of real estate is multiplied by the tax rate, which results in the amount of taxes to be paid.
The tax rates (which are established in the middle of the year) are generally not subject to review. However, the assessed value of real estate is subject to review by means of a tax appeal.
The assessment of real estate for the year 2012 is based on the value of real estate as of October 1, 2011. As a result, all tax appeals are simply to determine what the real estate was worth on October 1, 2011.
The worth of the real estate is proven by the testimony of an appraiser. For commercial real estate there are three principal ways an appraiser determines value: (1) the comparable sales method; (2) the income method; and (3) the cost method. Normally, all three methods are used to serve as a cross-check on the validity of the assessment.
The comparable sales method is simply what its name implies. Real estate is valued by comparing the sale prices of similar properties. The income method values real estate by determining the “net” income generated and assigning it a present value. This method is relatively complicated because it involves an analysis of income, expenses, depreciation, obsolescence and other factors. This is the most accurate methodology for analyzing hotels, parking lots, shopping centers, etc. This method is most reliable when the property in question is principally used for rental purposes.
The third method for valuing real estate is the cost approach. This approach is used for “unique” properties for which the prior two other methods of valuation are less appropriate. This approach is simply an analysis of what the property would cost to reconstruct less factors such as obsolescence. This method generally applies to unique structures such as electric generating plants, buildings that house newspaper printing operations, new construction, etc.
Real estate tax appeals determine whether the municipality or the owner is correct as to the value of a piece of property. The body that decides these issues can agree with one side or the other; it can also settle on another value.
Real estate tax appeals for this year must be filed by April 1, 2012. Appeals can be filed with the County Board of Taxation or, under certain circumstances, with the New Jersey Tax Court. Any decision of a County Board of Taxation can be appealed to the New Jersey Tax Court.
The savings from a tax appeal can be substantial. Using the numbers from last year, in Egg Harbor Township, every $100,000.00 that an assessment is reduced results in a saving of $4,100.00. An added benefit is that the reduced assessment can be “frozen” for three years so you don’t have to appeal for two more years, subject to certain exceptions.
Given the continued economic downturn, exploring the viability of a tax appeal could be an attractive belt-tightening initiative for the commercial property owner. Remember time is short. If you want to file an appeal, you only have until April 1.