by Mark Watts
A little preparation and a detailed presentation will help improve the outcome of a property tax reassessment.
As San Francisco property owners, we are well aware of Proposition 13, which declares that property taxes can’t be increased by more than 2% (or the inflation rate) and limits property tax assessments to a change in ownership or during construction. What local property owners are less aware of, though, is that there are several events that can trigger a full or partial re-assessment, like a partial sale of a property, the death of a real estate partner, or substantial home improvements.
However, if a tax assessment is triggered for your property, there are steps you can take to better the outcome.
Assessment Appeals Board
Once a tax assessment is triggered on a property, the owner can usually work with the Assessor’s office to reach an assessed value agreement. That is the best-case scenario. However, sometimes a property owner will need to appeal the property tax assessment with the Assessment Appeals Board. The Assessment Appeals Board members are referred to as Commissioner and are appointed by the county that has jurisdiction. The board is made up of three experts, usually real estate appraisers and brokers, accountants, or lawyers with more than ten years of experience and extensive real estate backgrounds.
The authority and rules followed by the Assessment Appeals Board are from the State Board of Equalization. The purpose of the Assessment Appeals Board is to act as a neutral referee between the Tax Assessor’s office and the taxpayer. There is no bias on the Assessment Appeals Board toward either the Assessor or taxpayer.
On the day of the appeal, the Assessment Appeals Board panel weighs the evidence presented by the Assessor’s office and the evidence presented by the owner, or owner’s representative. The Board makes a decision based solely on the evidence brought before them. Except in unusual circumstances, the three-hour hearing will be the final chance a taxpayer will have to present evidence for the appeal.
Given the relatively short timeframe to present evidence to the commissioners, it is important to have a well-organized presentation. The following are strategies for a successful presentation.
Presentation of the Appraisal
Present a clean and concise report and have extensive and detailed backup information available for questions. The report should have pictures of the property on the cover and first couple of pages. Next, include a single page of text describing important characteristics, such as the event that triggered the assessment, the property size, age construction, lot size and year built. This will give the commissioners a quick overview of the property and the reason for the appeal.
Due to time constraints, only include information important to the valuation, such as deferred maintenance or specialized improvements, for example. In the case of deferred maintenance, bring backup documentation such as pictures, multiple contractor’s estimates or actual repair costs.
The commissioners are San Francisco residents and knowledgeable regarding neighborhoods and economic conditions. There is no need to include “boiler plate” neighborhood descriptions or graphs of market conditions generated by popular real estate websites. Only pertinent site-specific information, such as location on a busy street, views, or topography, should be included if there is a point to be made.
The remainder of the report should pertain to the valuation of the property. The valuation of any parcel of real estate is derived principally through three approaches to the market value.
This approach is the summation of the estimated value of the land, as if vacant, and the reproduction of replacement cost of the improvements. From these are deducted the appraiser’s estimate of physical deterioration, functional obsolescence and economic obsolescence, as observed during inspection of the property and its environs. The Cost Approach is based on the premise that, except under most unusual circumstances, the value of a property cannot be greater than the cost of constructing a similar building on a comparable site.
Sales Comparison Approach
This approach is based on the principal of substitution—the value of a property is governed by the prices generally obtained for similar properties. In analyzing the market data, it is essential that the sale prices be reduced to common denominators to relate the degree of comparability to the property under appraisal. The difficulty in this approach is that two properties are never exactly alike.
An investment property is typically valued in proportion to its ability to produce income, so it involves an analysis of the property in terms of its ability to provide a net annual income. This estimated income is then capitalized at a market-oriented rate commensurate with the risks inherent in ownership of the property, relative to the rate of return offered by other investments.
All three approaches are used in assessment appeals. There is no requirement to use one approach, two approaches, or all three. The Cost Approach is most often used for appeals involving new construction or remodeling. Most income properties transfer based on income characteristics. Therefore, most assessment appeals will use the Income Approach, followed by the Sales Comparison Approach.
The Income Approach would ideally be presented on a single page with rent comparables and expense information presented on the following pages. Obviously, very complicated properties would require several pages, but the typical smaller income property can be presented on a few pages. The text describing the market rent, expenses, and overall rate conclusions should be brief. Keep additional backup information in your file in case the commissioners have follow-up questions regarding the sources of information or conclusions made.
The Sales Comparison Approach would include a comparable sales table and pictures of the comparable sales. There isn’t a minimum or maximum number of sales, but the most effective number of sales is typically three to six. The concept is to have enough sales to show the pattern of the market without including sales that are anomalies. The details of the sales need to be known. It is best to call one of the parties of the sale to confirm published information. The characteristics of the subject should be shown on the table along with the comparables.
The most typical units of comparison are price per unit, or price per square foot. An adjustment grid showing qualitative and quantitative adjustments can be used to show the reader the conclusion. Ideally the unit value range of the comparable sales will bracket the unit value concluded for the subject. The text describing the concluded unit value should be brief.
If more than one valuation approach is used, then the approaches need to be reconciled to reach a value conclusion. The conclusion needs to be well supported to be considered credible.
In summary, present a concise report by focusing on the key points and providing separate backup information for further consideration.
Rebuttal of the Other Side’s Presentation
The taxpayer can rebut the Assessor’s presentation. The appraiser will generally give the taxpayer a copy of the comparables they are using to value the property; if they don’t, ask for the list of comparables. Research their comparables for strengths and weaknesses. An internet search by property address will commonly reveal the listing package. Contact the parties to the sale to confirm the published information or if additional factors influenced the sale price. During the rebuttal, point out any factual inaccuracies first, then point out other factors such as location and size income characteristic.
Compromise and Be Honest
Both the Assessor and taxpayer have the right to change their concluded value during the hearing. If the other side’s appraisal reveals an error or omission in your report, admit the error and change your value. Compromise increases credibility in the face of an error.
Dishonesty is the worst that can happen in a hearing. Accurately report the physical and income characteristics of the property and comparables. Factual misstatements are likely to be caught by the other side and will substantially damage the credibility of your testimony.
Provide a concise report with photos; have on hand additional background information to answer questions; be professional and cordial; and compromise as needed and tell the truth.
If the above strategies seem daunting, hire a professional to represent you through the process. Real estate appraisers generally charge a flat fee for an appraisal and then charge hourly to appear before the Assessment Appeals Board. Property tax consultants generally charge based on the taxes saved.
After serving on the San Francisco Assessment Appeals Board from 2011 to 2016, these are my personal opinions of strategies for success. These opinions
are my own and are not meant to reflect any official opinion of the Assessment
Mark Watts is a partner in the real estate appraisal firm of Watts, Cohn and Partners, Inc. He served on the San Francisco Assessment Appeals Board from 2011 to 2016. He can be reached at email@example.com or 415-777-2666.