Property Tax Appeal Q&A: Harry Renwick, Part II
To file a property tax appeal, or not to file, that is the question. (Apologies, again, to William Shakespeare.) April 1st is the deadline for most property tax appeals in New Jersey. (May 1st if the municipality is undergoing a revaluation in 2010.) With April 1st fast approaching, it seemed like a good time to check in w/ Harry Renwick of Renwick and Associates.
As you will see, Harry has spent close to 50 years as a professional real estate appraiser and has extensive experience w/ real property tax appeals in New Jersey. (Full disclosure: my office does use Renwick and Associates as an expert in property tax appeals and we are proud to do so.) I felt that his perspective on tax appeals would be helpful to any property owner or manager who has decided to file a tax appeal or is considering it. Harry graciously agreed to participate in a Q&A session w/ me. Because of the amount of information, the session has been broken down into 2 posts. This is Part II. You can read Part I of the Q&A here. (The highlighting in the answers was done by me.) I hope that you find the following information useful:
- Are there any important factors that should be considered in deciding whether to file a tax appeal? One of the most important things is to accurately define within which sub-market the subject property is competing. Once the appropriate sub-market is defined, you can then identify market data which are truly comparable to the subject property and, therefore, an appropriate basis for analysis. (Comparing apples to apples, rather than apples to oranges.) There are thousands of competitive sub-markets that may come into play and have to be considered when properly establishing a property’s value, making use of a qualified professional essential.
Another factor to consider is properly establishing a property’s “highest and best use” and the potential pitfalls in doing so. For example, it may turn out that an older, single-story office building at a high-traffic intersection has a higher/better use as a retail entity. In such a case, the filing of an appeal w/o expert assistance could result in a cross-appeal by the town and a higher property value and tax burden. (Beware of cross-appeals by the taxing municipality.)
- What is a revaluation and how can it impact on prosecuting a tax appeal? A revaluation involves a periodic updating of all of the taxable and tax-exempt properties within a community. A revaluation generally serves 2 purposes. One purpose is to re-establish the current Market Value of all properties and their equitable share of the overall budget levies. Because property values become distorted over time by changing market conditions and other factors, this step is essential in order to insure equity within the system. (Make sure that each property carries its fair share of the tax burden.)
The second purpose is to stabilize the tax rate. Revaluation almost always results in a higher overall community value which when divided into the current levies will have a proportionate downward influence on the tax rate. To the surprise of many, stabilization of the tax rate typically results in greater amounts of revenue being raised for each penny of the tax rate. For example: Assume that a town’s total assessed value immediately before a revaluation is $500M. Each penny of a town’s tax rate is equivalent to one percent of the town’s total assessed value so, in this example, a penny from the town tax rate = $50,000.00 and each penny-increase would add another $50,000.00 in revenue to the town budget. However, if a revaluation resulted in a new total assessed value of $1B for the town’s taxable properties, then each penny of the town tax rate would result in $100,000.00 worth of revenue. In other words, depending on market conditions, a revaluation may enable a town to maintain or reduce the tax rate, which resonates w/ the public, while still increasing tax revenue.
Only in a revaluation year is the appeal deadline extended to May 1st as opposed to April 1st during a non-revaluation year. In a revaluation year the new valuation appearing on the tax bill (green card) is assumed to be an accurate representation of the current resale value of the property as of Oct.1st of the pre-tax year; that is not the case in a non-revaluation year.
Owners of commercial real estate should be wary of revaluations b/c towns usually tend to shift the tax burden to Class 4 properties, i.e., away from residential properties where the voters live!
- What is an equalization rate and why is it important? A town’s equalization rate is used to set a property’s Market Value based on the town’s current assessment of it and determine the fairness of the assessment. (Remember: under the NJ tax system, the assessed value of a property is supposed to closely approximate the Market Value. However, Market Value can change over time whereas the assessed value typically remains constant until the next revaluation. The equalization rate is the mechanism used to translate the town’s current assessed value of the property into Market Value a/k/a as the Equalized Value.) The equalization rate, a/k/a the town-wide ratio to true value (Market Value), is a ratio established for the community by the County Board of Taxation through the sampling of usable (arms length transactions) current sales of properties across all property classes as they compare to the values established under the last revaluation.
Example: Assume that the last revaluation set a property’s assessed value at $1M and the town has an equalization rate of .50. In such a case, the Indicated Current Market Value (ICMV) of that property would be $2M. In other words, the town is really placing a value of $2M on the property for purposes of tax burden. Now, if the current appraised value of the property is lower than the ICMV – e.g., $1.5M – then a successful appeal may be possible. An appraised value at $1.5M w/ a .50 equalization rate means that the property should be assessed at $750K, not $1M. Obviously, an assessed value of $750K should ultimately result in lower taxes against the property.
- What is an I/E report and why is it important? An I and E report is a request for income and expense information, sent out by the town assessor, to all Class #4 (income producing industrial, commercial or multi-residential) properties. The community has the right to request this information under the Chapter 91 laws and failure to comply can result in the loss of the right to appeal. [CBH note: failure to return an I/E report to the taxing municipality in a full and timely manner can subject an appeal to a motion to dismiss from the municipality.]
- How and when do you think the South Jersey commercial market will rebound? Which segment do you think will rebound first? My crystal ball is no better than most of the professional prognosticators. Having said that, one thing is for sure: commercial always lags behind residential. I don’t foresee any uptick in commercial until excess residential inventory is absorbed. We also need to regain a normal balance between “new construction” inventory and “re-sale” properties. Absorption of residential inventory and a re-balancing between new construction and re-sale are sure signs of job creation and improved purchasing power. Job creation and improved purchasing power generally translates to increased office and retail demand. I hate to say it, but I don’t see improvement in commercial for another 2-3 years.
- Final thoughts? Yes, the tax system in New Jersey is very difficult for the average taxpayer to understand. Many property owners enter into the appeal arena with the intention of lowering their total annual amount of tax and are surprised to find out that the only element that can be placed under appeal is the current market value as of the effective appeal date. An expert should be employed that understands the subtleties and vagaries of the tax laws and tax system and their impact on the valuation process. My recommendation is first to enter into a consulting arrangement in order to pre-test the probabilities of a successful appeal.
Thanks, Harry!
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