Mr. Glincher

Hospitality Law

Challenging Real Estate Taxes Can Impact a Property's Bottom Line

By Andrew Glincher, Office Managing Partner, Nixon Peabody LLP

Having a lower valuation is desirable for the purposes of real estate tax assessment. The lower the valuation, the lower the property taxes.

At a time when the economy is weak and the hospitality industry is suffering, any cost-saving can be helpful and a reduction in property taxes can sometimes provide a good financial cushion.

Valuation is based on a variety of factors including cash flow and, as we all know, cash flow is down for many properties right now. If that is the case, owners should definitely consider challenging their tax assessment. You may not wish to challenge your tax assessment if you anticipate refinancing soon and want to maximize your leverage.

Every city taxes real estate at different rates and has different procedures for challenging these assessments. But the process usually follows a scenario along the following lines.

When property owners feel they are being over taxed, they can file an appeal or application for an abatement within a specified period of time - in some jurisdictions as little as 30 days from the time they receive their tax bill. Generally, to preserve your rights, you will have to pay their taxes - as billed -and be reimbursed or credited (for future payments) later on if they are successful.

In your appeal, you will need to provide evidence that your property is worth less than the municipal authority thinks it is. Evidence could include a recent appraisal, income statements, a demonstration that vacancy rates are up and room rates are down, as well as copies of leases for retail or other tenants. You could also include sales figures for comparable properties. In some cases if you cannot settle your appeal, you will need to hire a valuation expert.

In most cases, there is an administrative tribunal that rules on tax challenges and, if you are not satisfied with the result, you can appeal the decision in court or in some jurisdictions, to the Appellate Tax Board. But the first step is to try to meet with local officials and see if you can negotiate a satisfactory settlement.

Obviously, these officials want to retain revenues and will need to be convinced of the merits of your case. Sometimes that's not possible. But it's always worth trying. Responsible officials may take a reasonable view of things and if your evidence is persuasive, agree to a reduction that provides at least some of the relief you are seeking. Remember, you have no guarantee of how things are going to be resolved if you proceed to court - it's often better and less costly if it is possible to work out a solution, even if it's a compromise, early in the process.

One of the issues for government officials is dealing with their own budget problems. If a property is a major taxpayer in a relatively small jurisdiction, a significant reduction in its taxes could cause a budget gap. These taxes go to pay the salaries of municipal workers and a sudden and unexpected shortfall - no matter what the merits - could pose difficulties. One negotiating tactic that sometimes proves helpful to both sides is agreeing to a tax reduction applied to future tax years, but not retroactively. Another approach is to phase in the reduction, or to repay the overpayment over time, either of which would minimize the budget impact.

If it proves impossible to arrive at a settlement, the legal process can sometimes take as much as several years before there is a definitive result. All the while, you will be paying the higher taxes and incurring the costs associated with the appeal. If you can hang on, and you're successful, you'll receive a windfall at the end - the overpayment of taxes will be reimbursed with interest. You can protect this reimbursement even if you sell the property, by addressing it in your Purchase and Sale Agreement.

Whichever strategy you pursue, virtually every property owner should be taking a look at their tax bill and at least considering a challenge. At a time of declining revenues, it is one of few fixed expenses you might be able to reduce.

Andrew Glincher specializes in the negotiation and resolution of business and real estate disputes. Mr. Glincher has represented developers and owners of retail centers, hotels, movie theatres, office and industrial buildings and parks, utilities, restaurants, subdivisions, apartment complexes, assisted living housing complexes, long-term care facilities and condominium projects. Mr. Glincher is admitted to practice in Massachusetts, the U.S. Court of Appeals, Third Circuit, the U.S. District Court, District of Massachusetts and the U.S. Tax Court. Mr. Glincher can be contacted at 617-345-1222 or aglincher@nixonpeabody.com Extended Bio...

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