Property Tax Fight Strategy
Tax Calculation
Property Tax amounts in Denver are determined by multiplying the assessor's value by the yearly adjustable mill levy. The assessor's value is a percentage of the actual appraised value of the property. All properties are re-appraised by the assessor's office every two years in the odd years. We are all receiving new valuations based on 2009 value estimates. In Colorado, the assessed value for commercial property is 29% of appraised value. Residential property is assessed at 7.96 % of appraised value. This difference in the calculation of assessed values is why commercial property taxes are much higher than residential taxes. The current mill levy in Denver for all properties is 65.139. An example of a tax determination calculation of a $200,000 commercial property is as follows:
Actual Value: $200,000
Assessed Value: $200,000 X 29% = $58,000
Tax Amount: $58,000 X Mill Levy (65.139) = $3,778.06
An example of a tax determination calculation of a $200,000 residential property is as follows:
Actual Value: $200,000
Assessed Value: $200,000 X 7.96%= $15,920
Tax Amount: $15,920 Mill Levy (65.139)= $1,037
Why are Taxes Calculated this way?
Property taxes are calculated this way by law. It may seem unfair to many that commercial property bears such a heavy burden. The reason that residential property has such a low assessed value percentage is due to the belief that living expenses should be minimized to keep living expenses down. There have been several challenges to this law called the Gallager Amendment, but they have been unsuccessful and most feel impossible to ever garner the support to change it because of the substantially higher number of residential property owners than commercial property owners. A change in the assessment percentages would increase the residential real estate taxes which would not be supported by the majority of Denver Voters.
The Mill Levy is a multiplier for determining the property tax amount. Everyone's tax bill shows a breakdown of the Mill Levy. Many years ago the Mill Levy would actually adjust down if the property valuations increased so much that the City had excess revenue. As we all know, Government never has excess revenues so there are much greater pressures on raising the Mill Levy than lowering it.
How to challenge property tax amounts
Due to the current laws, property owners only chance of reducing tax amounts is by reducing the appraised value of the property. Appraised value of property is generally determined by using two different methods of valuation, and then through the appraiser's expertise, extrapolating a value by combining the information obtained from the two methods.
The first method of valuation that the appraiser uses is the market approach. Basically, the appraisers find similar properties that have sold recently and they compile the data to determine a market value of the subject property.
The second method of valuation that the appraiser uses is the income approach. Basically, the appraiser determines the Net income, which is the amount of income remaining after payment of all expenses, estimated vacancy and a reserve for repairs. The appraiser then determines a capitalization rate and divides the net income by the capitalization rate which gives a theoretical value. The capitalization rate is a percentage figure that is also determined by market studies. The capitalization rate can be simply defined as a rate of return that a particular investor will require on his investment. Many, many factors come into play when determining a capitalization rate which I will not even try to go into with this article.
Understanding these two methods of valuation and are key to fighting the valuations of the properties that we are all receiving. Everyone must understand these techniques to be successful at protesting.
Income Approach problem for valuation
In Downtown Denver the income generated from the actual real estate itself, divided by the capitalization rate, will seldom generate any valuation that has been shown from market sales. An example is a parking lot located at Park Avenue and Curtis will barely generate enough income from parking revenue to cover the expenses. Therefore the Net Income is zero and when divided by the capitalization rate the value is zero. However, the appraiser is determining that property in this area is worth between $50- $90 per foot and determining the value without any consideration of the income approach. This is typical of almost all property in downtown and especially in the BallPark, Arapahoe Triangle and commercially zoned Curtis Park properties.
Market Sales Approach problem for valuation
The market sales approach to value determination is the preferred and dominant technique used by the Denver Assessor's appraisal staff. Due to the dynamic market that existed from 2005 through 2008 there are numerous sales to use for comparable sales analysis. The appraisal staff does minimal research to compare property and they will take several sales of vacant land or several sales of improved property and determine a value of a property using a comparative sales analysis. The Assessor's office has used the comparable sales to arrive at the high assessments and consequential high tax amounts. This method of valuation does not evaluate the reasons for the sales. In Downtown Denver, no two parcels or the motivation that created the sale are comparable. Therefore, the market approach to determining value is incomplete and therefore not valid.
What needs to happen to get the valuations reduced so our taxes will drop?
It is impossible to change the Gallager amendment. The assessor's office will not consider using the income approach for most downtown property. It is impossible for the assessors office to consider any other type of method for determining property tax amount other than value and they believe value is best determined by comparative sales. Therefore the strategy needs to focus on attacking what is truly a comparable sale.
Reasons for purchase
Over the 30 years I've been selling downtown property there are many reasons why people and businesses purchase property downtown. The reasons for purchase have a lot to do with why a particular price is paid. Here are the main reasons people purchase downtown:
1. For immediate development
2. For future development
3. For income
4. To add to an existing parcel
5. To protect an existing parcel
6. As a tax deferred exchange
7. To improve access to one's property
8. For expansion of a business
9. For parking needs for employees
10.For parking needs for customers
11.For visibility
12. To erect a billboard sign
13. To change the front of a business for better exposure
14. To relocate their business
15. To block an assemblage
Location, is it comparable?
Everyone knows the old saying about real estate that value is all about location, location and location. In Downtown Denver no two locations are exactly alike. No two locations have all the same features. In any dense market area, a 25 foot difference in location can make the value difference totally different. An example is a two lot parcel on the corner vs. a 2 lot corner in the middle of the block. For a small developer wanting to develop a small project he can only build on a corner lot so the middle of the block parcel has no value to this developer. On the other hand a developer assembling a block for a large development will need all the parcels to complete the site for the development so an interior parcel may have more value than the corner just based on true market principals of value is what price two people agree on for a particular property.
Another example is a building sale on a prime corner. The building has completely unusual characteristics that a particular buyer wants. The building may be renovated or need complete renovation. The building may work for a retailer and not for an office user. Consequently, this building is totally unique. It has a different location, potential use, renovation and redevelopment issues that will be unique to it. How does an appraiser realistically and fairly take this into account when determining value? He can't possibly and therefore the market approach is flawed.
If we were talking about a dense industrial area where the uses are pretty similar an appraiser can be more confident he is using comparable sales. In Downtown Denver, where which side of Broadway a property is on can effect the value by 50% or which zoning a property has can raise value by 50%. In Downtown Denver the zoning changes in the alleys and across streets. A property can have a totally different zoning than an adjacent property. A property may be encumbered with a height restriction, development restriction, be in a special assessment district, not have parking, have a lot of parking, have limited access or be on a corner.
The obvious point here is that the appraiser is not taking into consideration the true reasons for purchase an factoring in all the unique characteristics of the property.
Some properties may not benefit from consideration of all these issues because they are either so primely located and utilized or they are fully improved and leased on long term agreements.
Most properties however, will benefit from a true analysis of these characteristics and it is on these unique characteristics where all of us need to force the assessor's office to input into their determination of value.
Jamis has been involved in the majority of downtown real estate transactions and is familiar with what motivated the sales and how the properties compare. We are available for consultation with the City Assessor should you be interested in filing a tax protest. Jamis charges a flat fee for services based on 1/2 day or all day services. We do not ask to participate in a percentage of the savings that could be obtained.
.
Property Tax amounts in Denver are determined by multiplying the assessor's value by the yearly adjustable mill levy. The assessor's value is a percentage of the actual appraised value of the property. All properties are re-appraised by the assessor's office every two years in the odd years. We are all receiving new valuations based on 2009 value estimates. In Colorado, the assessed value for commercial property is 29% of appraised value. Residential property is assessed at 7.96 % of appraised value. This difference in the calculation of assessed values is why commercial property taxes are much higher than residential taxes. The current mill levy in Denver for all properties is 65.139. An example of a tax determination calculation of a $200,000 commercial property is as follows:
Actual Value: $200,000
Assessed Value: $200,000 X 29% = $58,000
Tax Amount: $58,000 X Mill Levy (65.139) = $3,778.06
An example of a tax determination calculation of a $200,000 residential property is as follows:
Actual Value: $200,000
Assessed Value: $200,000 X 7.96%= $15,920
Tax Amount: $15,920 Mill Levy (65.139)= $1,037
Why are Taxes Calculated this way?
Property taxes are calculated this way by law. It may seem unfair to many that commercial property bears such a heavy burden. The reason that residential property has such a low assessed value percentage is due to the belief that living expenses should be minimized to keep living expenses down. There have been several challenges to this law called the Gallager Amendment, but they have been unsuccessful and most feel impossible to ever garner the support to change it because of the substantially higher number of residential property owners than commercial property owners. A change in the assessment percentages would increase the residential real estate taxes which would not be supported by the majority of Denver Voters.
The Mill Levy is a multiplier for determining the property tax amount. Everyone's tax bill shows a breakdown of the Mill Levy. Many years ago the Mill Levy would actually adjust down if the property valuations increased so much that the City had excess revenue. As we all know, Government never has excess revenues so there are much greater pressures on raising the Mill Levy than lowering it.
How to challenge property tax amounts
Due to the current laws, property owners only chance of reducing tax amounts is by reducing the appraised value of the property. Appraised value of property is generally determined by using two different methods of valuation, and then through the appraiser's expertise, extrapolating a value by combining the information obtained from the two methods.
The first method of valuation that the appraiser uses is the market approach. Basically, the appraisers find similar properties that have sold recently and they compile the data to determine a market value of the subject property.
The second method of valuation that the appraiser uses is the income approach. Basically, the appraiser determines the Net income, which is the amount of income remaining after payment of all expenses, estimated vacancy and a reserve for repairs. The appraiser then determines a capitalization rate and divides the net income by the capitalization rate which gives a theoretical value. The capitalization rate is a percentage figure that is also determined by market studies. The capitalization rate can be simply defined as a rate of return that a particular investor will require on his investment. Many, many factors come into play when determining a capitalization rate which I will not even try to go into with this article.
Understanding these two methods of valuation and are key to fighting the valuations of the properties that we are all receiving. Everyone must understand these techniques to be successful at protesting.
Income Approach problem for valuation
In Downtown Denver the income generated from the actual real estate itself, divided by the capitalization rate, will seldom generate any valuation that has been shown from market sales. An example is a parking lot located at Park Avenue and Curtis will barely generate enough income from parking revenue to cover the expenses. Therefore the Net Income is zero and when divided by the capitalization rate the value is zero. However, the appraiser is determining that property in this area is worth between $50- $90 per foot and determining the value without any consideration of the income approach. This is typical of almost all property in downtown and especially in the BallPark, Arapahoe Triangle and commercially zoned Curtis Park properties.
Market Sales Approach problem for valuation
The market sales approach to value determination is the preferred and dominant technique used by the Denver Assessor's appraisal staff. Due to the dynamic market that existed from 2005 through 2008 there are numerous sales to use for comparable sales analysis. The appraisal staff does minimal research to compare property and they will take several sales of vacant land or several sales of improved property and determine a value of a property using a comparative sales analysis. The Assessor's office has used the comparable sales to arrive at the high assessments and consequential high tax amounts. This method of valuation does not evaluate the reasons for the sales. In Downtown Denver, no two parcels or the motivation that created the sale are comparable. Therefore, the market approach to determining value is incomplete and therefore not valid.
What needs to happen to get the valuations reduced so our taxes will drop?
It is impossible to change the Gallager amendment. The assessor's office will not consider using the income approach for most downtown property. It is impossible for the assessors office to consider any other type of method for determining property tax amount other than value and they believe value is best determined by comparative sales. Therefore the strategy needs to focus on attacking what is truly a comparable sale.
Reasons for purchase
Over the 30 years I've been selling downtown property there are many reasons why people and businesses purchase property downtown. The reasons for purchase have a lot to do with why a particular price is paid. Here are the main reasons people purchase downtown:
1. For immediate development
2. For future development
3. For income
4. To add to an existing parcel
5. To protect an existing parcel
6. As a tax deferred exchange
7. To improve access to one's property
8. For expansion of a business
9. For parking needs for employees
10.For parking needs for customers
11.For visibility
12. To erect a billboard sign
13. To change the front of a business for better exposure
14. To relocate their business
15. To block an assemblage
Location, is it comparable?
Everyone knows the old saying about real estate that value is all about location, location and location. In Downtown Denver no two locations are exactly alike. No two locations have all the same features. In any dense market area, a 25 foot difference in location can make the value difference totally different. An example is a two lot parcel on the corner vs. a 2 lot corner in the middle of the block. For a small developer wanting to develop a small project he can only build on a corner lot so the middle of the block parcel has no value to this developer. On the other hand a developer assembling a block for a large development will need all the parcels to complete the site for the development so an interior parcel may have more value than the corner just based on true market principals of value is what price two people agree on for a particular property.
Another example is a building sale on a prime corner. The building has completely unusual characteristics that a particular buyer wants. The building may be renovated or need complete renovation. The building may work for a retailer and not for an office user. Consequently, this building is totally unique. It has a different location, potential use, renovation and redevelopment issues that will be unique to it. How does an appraiser realistically and fairly take this into account when determining value? He can't possibly and therefore the market approach is flawed.
If we were talking about a dense industrial area where the uses are pretty similar an appraiser can be more confident he is using comparable sales. In Downtown Denver, where which side of Broadway a property is on can effect the value by 50% or which zoning a property has can raise value by 50%. In Downtown Denver the zoning changes in the alleys and across streets. A property can have a totally different zoning than an adjacent property. A property may be encumbered with a height restriction, development restriction, be in a special assessment district, not have parking, have a lot of parking, have limited access or be on a corner.
The obvious point here is that the appraiser is not taking into consideration the true reasons for purchase an factoring in all the unique characteristics of the property.
Some properties may not benefit from consideration of all these issues because they are either so primely located and utilized or they are fully improved and leased on long term agreements.
Most properties however, will benefit from a true analysis of these characteristics and it is on these unique characteristics where all of us need to force the assessor's office to input into their determination of value.
Jamis has been involved in the majority of downtown real estate transactions and is familiar with what motivated the sales and how the properties compare. We are available for consultation with the City Assessor should you be interested in filing a tax protest. Jamis charges a flat fee for services based on 1/2 day or all day services. We do not ask to participate in a percentage of the savings that could be obtained.
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