Incompetence Means You Pay More!

During a recent property tax appeal case we were shocked to hear the local property tax assessor make the statement, "Have him close the business and I'll consider lowering the taxes". We looked at one another in sheer amazement and before I could inform the assessor that he had just admitted to taxing the business enterprise as opposed to strictly the real estate, Clay had taken out a legal pad and said "Wait! Let me quote you on that!" The confident assessor gladly made the statement once again unaware of the fact Clay was actually documenting the quote to be utilized later during a formal appeals board hearing. Real Estate Taxes are just that, a tax that is attributable to the real estate only. This assessor made it quite clear that this personal care facility was being taxed, not only on its real estate, land plus improvements, but on the business enterprise (intangible assets) associated with the business occupying the improved property.

Appraisal literature features an abundance of articles addressing the valuation of various properties with a focus on the segregation of intangible components from the tangible assets. Most state laws hold only real property and other tangible assets subject to taxation so the importance of separating these components of value is most apparent in property tax assessment. Intangible assets, though they may enhance the value of the total operating enterprise, are not subject to ad valorem taxes.

Commercial property, especially nursing homes, personal care centers, assisted living center and hospitality owners should analyze their ad valorem tax obligation immediately. We continue to find that most assessors are incorrect in the way they are assessing these specialized types of properties. Many times these properties sell and transfer including not only the real estate but the businesses themselves. The majority of the assessing officials will simply assess the property at this sale price, which often times not only include the real estate but also the personal property and business enterprise value (BEV) which is also referred to as going-concern value.

Valuing the going concern is fairly straightforward using discounted cash flow techniques or an income capitalization approach. The difficulty arises when there is a need to decompose the going concern value into the various elements as required for assessment and condemnation assignments.

In distinguishing between BEV and real estate value, it is fundamental to recognize that income generated from a business conducted within the real estate is not the appropriate measure of real estate value. Instead, that income is the value of the going concern. For many special purpose properties, the business enterprise component is substantial, so the potential for error is large if going concern value and real estate value are confused.

In using the Income Approach, it must be kept in mind that the proprietary nursing home is more than a real estate entity consisting of land and buildings. It is a facility equipped and staffed for providing personal services. Recognition must be given to this factor in the form of a "business profit" to the owner of operator.

The real estate alone (land and buildings) is not the preponderant income-producing factor as in a facility such as an apartment building. A nursing home provides many personal services to its occupants as part of the charge for occupying a room or a bed. These include food, nursing care on a 24-hour basis, and a limited amount of entertainment....The proprietary nursing home is a "special use" property. As such, the market is quite limited. Furthermore, the special design limits the alternate uses for the real estate.

During a recently settled case of a property containing both a personal care facility and an assisted living center, we argued that the personal care facility added no value and in fact was a determent to the overall property. This was based upon the KY required payment arrangement of $37.80 per bed per day and that no prudent investor would even attempt to buy the property and continue this center based on that income. This is attributed to the going-concern and was provided to the assessor to demonstrate the lack of current success of the business within the real estate. In addition this property suffered an immeasurable amount of functional obsolescence as it was constructed in 1969. The assessor agreed and explored alternative uses for the assisted living center and was also of the opinion it did not represent the highest and best use of the property. The total assessment was lowered from $6,087,100 to $4,000,000 with an annual tax saving of $29,267 or $146,337 over the next five years. The total savings are immeasurable as they are carried into perpetuity due to the fact there is a new starting point ($4,000,000) in which the assessment may be raised in the future.

The land and buildings are not the chief income-producing factors in a nursing home......The value of a nursing home is enhanced by its reputation and good will in the medical and nursing field and in the community at large.

If a firm is prosperous it does not want to sell except for a bonus; if it is bankrupt, it often sells at a bargain upset price; and in neither case is true value measured. When Dodge Bros., automobile manufactures was purchased by capitalists, it was reported that an allowance of many millions of dollars in stock was paid for goodwill.

It is therefore readily understood that a law requiring property to be assessed at its actual value, its real value, its cash value, its market cash value or its full cash value does not mean its "transaction value" where cash paid represents but a fraction of the sales price, nor does it mean the all cash price paid at a forced sale.

This intangible value is not generally taxable. A tax assessor is often confused when an industrial property sells at a figure greatly above the assessed value. He has not the information at hand from which to fathom the intricacies of patent rights, goodwill, etc., and often the problem is left unsolved.

Ad valorem tax is one of the only taxes one pays that is based upon someone's opinion of value. Incompetence means you pay more! Don't let an incompetent assessor cost you thousands of dollars by making you pay more than your fair share by including BEV!

By Bryan S. Reynolds and Clay J. Wells