Incompetence means you pay more!
During a recent property tax appeal case, we were surprised to hear the local property tax assessor make the statement, “Make me go out of business and I’ll consider lowering taxes.” We looked at each other in complete astonishment and before I could inform the appraiser that I had just admitted that I was taxing the business enterprise rather than strictly real estate, Clay pulled out a notepad and said, “Wait! Let me quote you on that!” that!” The unsuspecting evaluator gladly made the statement yet again unaware of the fact that Clay was actually documenting the citation to be used later during a formal appeals board hearing. Real Estate Taxes are just that, a tax that is attributable only to real estate. This assessor made it quite clear that this personal care facility was subject to tax, not only on its real estate, land, and improvements, but also on the business enterprise (intangible assets) associated with the business that occupies the improved property.
The appraisal literature features a large number of articles dealing with the valuation of various properties with a focus on segregating intangible components from tangible assets. Most state laws have only real property and other tangible assets subject to tax, so the importance of separating these components of value is most apparent in property tax assessment. Intangible assets, although they may increase the value of the total operating company, are not subject to ad valorem taxes.
Commercial properties, especially nursing homes, personal care facilities, assisted living facilities, and hotel owners should review their ad valorem tax liability immediately. We continue to find that most appraisers are incorrect in how they appraise these specialized types of properties. Many times these properties are sold and transferred including not only the real estate but also the businesses themselves. Most appraisal officers will simply appraise the property at this sales price, which often includes not only real estate, but also business and personal property value (BEV), which is also known as appraisal value. running business.
Going concern value is fairly straightforward using discounted cash flow techniques or an income capitalization approach. The difficulty arises when there is a need to break down the going concern value into the various elements required for appraisal and condemnation allocations.
In distinguishing between BEV and real estate value, it is critical to recognize that income generated from a business conducted within real estate is not the proper measure of real estate value. Instead, that income is the value of the going concern. For many special purpose properties, the commercial enterprise component is substantial, so the potential for error is great if going concern value and real estate value are confused.
When using the Income Approach, it should be kept in mind that the nursing home owner is more than a real estate entity consisting of land and buildings. It is a facility equipped and staffed for the provision of personal services. Recognition of this factor should be given in the form of a “commercial benefit” to the owner of the operator.
Real estate alone (land and buildings) is not the predominant factor in generating income as it is 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 bed. These include food, 24-hour nursing care, and a limited amount of entertainment…. The proprietary nursing home is a “special use” property. As such, the market is quite limited. In addition, the special design limits the alternative uses of the property.
During a recently settled case involving a property that contained both a personal care center and an assisted living facility, we argued that the personal care center did not add value and was, in fact, a determination for the property as a whole. This was based on the KY required payment agreement of $37.80 per bed per day and that no prudent investor would attempt to purchase the property and continue this facility based on that income. This is attributed to the going concern and was provided to the appraiser to demonstrate the lack of current business success within real estate. Additionally, this property suffered an immeasurable amount of functional obsolescence since it was built in 1969. The assessor agreed and explored alternative uses for the assisted living facility and also felt that it did not represent the highest and best use of the property. The total assessment was reduced from $6,087,100 to $4,000,000 with an annual tax savings 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 that there is a new starting point ($4,000,000) at which the assessment can increase in the future.
Land and buildings are not the primary income-generating factors in a nursing home… The value of a nursing home is enhanced by its reputation and goodwill in the medical and nursing field and in the community at large .
If a business is prosperous, it doesn’t want to sell except for a bonus; if he is bankrupt, he often sells at a bargain price; and in neither case is the true value measured. When capitalists bought the Dodge Bros. auto plant, it was reported that a multimillion-dollar allotment of goodwill stock was paid.
Therefore, it is easily understood that a law that requires property to be appraised at fair value, fair value, cash value, market cash value, or full cash value does not mean its transaction” when the cash paid represents only a fraction of the sale price, nor does it mean the full cash price paid in a forced sale.
This intangible value is generally not subject to tax. A tax assessor is often confused when an industrial property is sold at a figure well above its appraised value. You don’t have the information at hand to unravel the complexities of patent rights, goodwill, etc., and the problem often goes unsolved.
The ad valorem tax is one of the only taxes in a country that is based on someone’s opinion of value. Incompetence means you pay more! Don’t let an incompetent advisor cost you thousands of dollars by making you pay more than your share by listing BEV!
By Bryan S. Reynolds and Clay J. Wells