Some cash-starved states are finagling with their industrial and commercial property tax assessments to pump up their coffers—and sometimes it’s not on the up-and-up. They’re doing it in such a way that it requires a business valuation professional to sort it all out and prevent assessors from improperly inflating ad valorem property tax bills. This presents an emerging practice opportunity.
Here’s the story: Ad valorem taxes on industrial and commercial properties are often seen as a great way for localities to increase revenue. But they can’t simply raise tax rates or arbitrarily increase assessed values—unless they get creative. “Many assessors have moved from applying traditional real estate valuation methods to effectively applying business valuation methods to come up with assessment values. The trouble is, these methods often produce a value that encompasses the value of the taxpayer intangible assets—which are not subject to property taxes in some jurisdictions,” says Robert Reilly (Willamette Management Associates). That means that many commercial property owners are paying too much tax.
“In some cases, the assessors are not appraising the taxpayer’s real estate and the tangible personal property. Rather, they’re appraising some or all of the going-concern business that operates at the industrial or commercial property,” says Reilly. Certain types of industrial and commercial property are particularly susceptible to this practice, such as hotels, hospitals, shopping malls, theaters, stadiums, and the like. Property owners are often unaware that this is happening—and some assessors are hoping they stay that way. This presents an opportunity for valuation professionals who have expertise with identifying and valuing intangible assets.
What to do: Valuation analysts need to examine their local areas to see whether the laws exempt certain intangible assets from commercial property taxes, Reilly advises. Then, determine whether the assessor’s property assessment for the client property includes the value of exempt intangible assets. If it does, they need to be identified and valued so they can be extracted from the property tax assessment.
Because the intangible asset valuations are performed in the context of property taxes, analysts need to be aware of some nuances, which Reilly explained during a recent webinar, Intangible Asset Valuation for Property Tax Compliance and Appeal Purposes.
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