Ep. 10 | Property Tax Appeals

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In this follow-up to episode number 9 of The Mobile Home Park Lawyer Podcast, Ferd explains all the steps to appealing your tax bill. Enjoy!

 

“As we all know, taxes are a big expense, and when you buy a property from somebody that hasn’t sold it in decades, it’s very likely that you’re paying a higher price than the county assessor has it on the books for.”

 

HIGHLIGHTS:

0:00 – Intro
2:24 – Look at comps or the other properties in the area
3:08 – Sales chasing
3:48 – Appraisers need to appraise fairly and accurately
4:09 – There are 3 reasons to appeal; valuation, classification and discrimination
5:20 – Assessment is supposed to be revenue neutral
6:41 – Informal appeals and getting your documents together
9:20 – One of the benefits of the industry is that theres little barrier to entry
10:21 – Pull comps, and come up with the equalized value, and this will show a big difference in what you are paying
12:08 – Two options for the county are lower the equalized asset value or increase everyone else
14:03 – If you lose the board of equalization, you then go to the state tax commission
14:22 – Most of the time you need to hire an attorney and licensed appraiser just to play the game
14:51 – Going through a trial
16:13 – If you lose your only option is to then appeal in circuit court
17:36 – It’s important to continually do a cost-benefit analysis

 

RESOURCES:

Appealing Your Property Valuation Taxes for a MHP

 

FULL TRANSCRIPTION:

Welcome back MHP nation. Here today with part two of our series on property tax projections. And now we’re going to talk today more about property tax appeals. So if you didn’t listen to the first episode, go back and do that. That’s going to tell you how to properly budget for potential tax increases and some strategies to try to mitigate the property tax increases. Because as we all know, taxes are a big expense. And when you buy a property from somebody that hasn’t sold it in decades and has owned it for years and years, it’s very likely that you’re paying a higher price than the county assessor has it on the books for, and that could really ruin your weekend. When you get that tax notice saying your bill’s going to go from 10,000 to 40,000 things like that. And from a valuation perspective, with a cap rate, you’re going to multiply that pain. You know, a 10 cap, you multiply it by 10X, five cap, 20X. So definitely got to keep your property taxes and check. If it didn’t work, though, don’t worry. All is not lost. You can appeal your property taxes. You can do this yourself. You can hire a tax attorney there, some tax reps or tax appeal guys that’ll do it on a contingent fee even. It’s going to be different processes and different types of personnel on a state by state jurisdiction by jurisdiction basis. Shoot me an email at ferd@themhplawyer.com if you need a reference, I mean, I don’t do a lot of this work anymore. I used to do more high profile cases, but I do the occasional tax appeal case. And I know some guys that are kind of nationwide. So I may just send you to those guys if you can’t do it yourself. And at a certain point, you have to do it with a professional. And I’ll get into that here as we go through the process.

So again, getting your taxes to where they should be in accordance to the law is crucial to mobile home park operations. So the first thing you do, I can really go through four things here today. First one is you look at the comps, meaning other properties, other like kind properties, particularly other mobile home parks in your region. Did everybody else go up? If you bought a property for a million dollars and it was previously on the books at 250,000 and you got a 4X increase, look at everybody else. I would bet you dollars to donuts that everybody else didn’t go up 4X. And what happened is the County assessor was lazy and they got noticed with the sale generally by a sales verification form. If you’re in a disclosure States or disclosure County, and they did, what’s called a spot appraisal, they just looked at your property and said, hey, we’ll just appraise this one. And they chase the sale and chasing the sale is not good practice. In case you don’t know what the definition of sales chasing is. I grabbed this from the international association of assessing officers. I’m just going to read you the first part of this and it’ll get the point across. Sales chasing is the practice of using the sale of a property to trigger a reappraisal of that property at or near the selling price. If sales was such appraisal adjustments are used in a ratio study the practice, invalid uniforming results. It causes invalid appraisal level results. Unless similar unsold parcels are reappraised by a method that produces it. Blah blah blah basically they chase your sale. They jacked up your price. They didn’t do to other people. That’s not fair.

All right, so that’s going to be the next point we’re going to talk about is fair and accurate. Appraisers and assessors are supposed to do two things, they’re supposed to appraise your property fairly and accurately. So if you paid a million dollars for it, it’s probably accurate. That doesn’t mean it’s fair. Meaning if you go up to a million dollars and nobody else does, you’re not being treated similarly, that gives you a right to appeal. So there are typically three types or reasons you can appeal. Based on valuation, which in this case, you wouldn’t appeal based on valuation because million dollars might be right. You’d probably still check that box just to preserve that argument, but that’s not the real one.

The next reason would be classification. This isn’t for this case either, but classifications, like was it supposed to be classified as Ag or residential or commercial or tax exempt. But the third appeal criteria is the one you’re going to look at here, discrimination. And that’s basically say, Hey look, you treated me differently than my peer properties. Discrimination has nothing to do with race, creed, color. This is all about disparate treatment in valuation. And it’s a great reason to appeal. I’m actually going through one now. Rarely do I get the welcome neighbor 4X reappraisal, but it just happened to me on a property in Illinois and they literally just chase a sale at the exact same number. So I start to put together my documents. I’ll get to my documents in a minute. But the purpose of appraisal in mass appraisal for County assessors is to help taxing districts like school districts and libraries, and such generate their budget and get the proper amount of revenue to perform their services. Well, assessment is supposed to be revenue neutral. What that means is if, if everybody in the community goes up 10%, the aggregate assessed values are 10% higher. Well then the taxing districts are supposed to decrease their levy rate by 10%. And based on the math formula explained in the last podcast, what that means is there’s no net increase in tax dollars. Great. That’s all fine. Well, there’s a problem. The problem is similar to the old saying of, you know, all politics are local. Well, let me tell you all property tax assessments are super local, okay. By that, I mean, if I go up 300% or 400% and everybody else doesn’t then guess what? I’m a small blip in the total aggregate assessed value for a county. So my little bitty increase of $780,000 is not going to move the needle and the taxing districts are not going to lower their levy rate. So as a result, I’m going to get a 300% property tax bill increase. It’s going to really murder my deal and kick my NOI right in the stomach. So how do we get over this? How do we survive this, the discrimination that just pisses us off?

Well, there’s a process. And typically there are, it depends on the jurisdiction, really three to four typical steps of the review process. And then there’s some true litigation stuff that I’ll reference, but that’s pretty uncommon. The first is an informal appeal. This is going to the County assessor, either in person or via phone or email and saying, Hey, I’m going to talk about my assessment. Can we change this? And sometimes assessors will try to kick the can down the road or basically like Dodge topic. Like, Oh no, I don’t have to do with your tax bill. I just set values that the collector or the taxing districts, they are the bad people that raise your taxes. It’s like, that’s pretty disingenuous because the valuation is the key item in the formula. And if you only increase my valuation and not other people, then the taxing districts are not going to have to lower their levy. So come on, Mr. And Mrs. Assessor, you’re jacking up my taxes and if you don’t do it, nobody else that that’s not fair and I’m going to appeal. So I try to have an informal appeal. Typically I get my documents in a row at that point, but really you got to get your documents in a row before you do the next step, which is a formal appeal. If you can’t win, if you cannot win the informal, meaning you can’t convince that person that they’re wrong, you’re probably not going to win the formal. Cause you think go back to the same person, which you fill out paperwork and I call it, I felt that whatever forms they give me, you know, sometimes it’s called an assessment complaint and I fill it out. How much is the land worth in processors opinion? What’s it worth in my opinion, what’s the acreage and the address and the square footage of the buildings and all that kind of crap. You fill out their paperwork. But then I always perform a supplement to the assessment complaint and I give a narrative. I reference in this case, my the sales chasing I’ve referenced the purposes of ad valorem, or meaning according to valuation techniques. And then I’ve referenced the components of a mobile home park. And I’ll typically say, hey, look guys, I just paid a million dollars for 10 acres of dirt. Okay. 10 acres of dirt. If it was good farm ground in Iowa or Western Illinois, maybe 10,000 an acre. So 10 acres times 10,000 is 100,000. So I just paid a million. Am I the dumbest buyer ever? Or is there something else in the purchase price? And I don’t mean in this instance, mobile homes, you can put mobile homes or other, tractors and snowplows dip in there, but that’s not very, normally it’s not a very big portion of the $1 million. The big portion is the going concern and the good will, for example, the license in business operations, the permit. And I think that makes sense to all of us investors. I mean, I wouldn’t pay a million dollars for 10 acres of corn or 10 acres of dirt. In fact, this is worse than kind of virgin dirt for planting corn in the heartland. This has got some utilities in the way, some homes in the way, if I wasn’t trying to do it just for dirt, I got to scrape the site first.

So what am I paying for? I am not an idiot. I’m paying for the intangible personal property, the good will going concern the license to business operations. And that makes some sense, right? I mean, one of the key benefits of this industry is there’s a barrier to competition. There’s not really making very many of these things anymore. So if I’ve got one, that’s good. So if a seller has a permit and has an operating business, I’m willing to pay a premium, especially if there’s an ongoing business, meaning there’s already clientele who were there, their homes are there, they’re paying rent.

So I’ll pay a million dollars for 10 acres and not before that value component has nothing to do with ad valorem, real estate, County appraisals. Okay. So you need to break that down. If you can show in your purchase contract that you allocated that, you can generally convince the assessor to remove that portion. But sometimes for other reasons in your sales disclosure, you don’t originally do that because there’s income tax consequences and all this cause depreciation, cost segregation, etc., that will be for another day. But ultimately you can use that to break down for the assessor just generally like, hey, this is what I paid for. I didn’t pay for this land. But then really what I like to do in the real value add here in the formal appeal of your documents is you pull comps. So I’ll pull comps, I’ll have a category and get the name of the MHP. And I’ll put an asterisk by mine. This is a subject of this appeal, the values of the subject or the proposed values by the assessor.

I’m looking at one right now. This is an Illinois. The assessor says my market value is 1,425,000. It’s got 88 lots. And that comes out to a current assessed value of 5,003 98. And the assessment ratio in Illinois is 33 to 30%. So I take 1,425,000 times one-third equals 475,000 divided by 88 equals 5,398 per lot. And then I look at the next comp and I do the same math based on lots and MD. And I’m like this one 772, Holy cow, that guy’s getting a deal. Then 2710, then 2226, then 1109, 959, 1112, 1103, 3991. That one went up because I sold that one. Sorry guys. And then another one, 200970. Okay. So this is about the 10 in this County. The average assessed value per lot as evidenced by me is $2,130. So if I took that $2,130 times, my 88 lots, I come up with an equalized, that’s key equalized assess value is based on the average lot per lot valuation within the County, then applied to them are lots for each property. And it comes up with mine is 187,043. Well, the assessor’s got me on for 475,000. Well, it doesn’t seem fair. This seems like that would be discrimination. That would not be bad and maybe an accurate price, but it’s not fair relative to my peers.

So he has two options. He can either lower my equalized assess value, and real assessed value, or he can increase everybody else. If he increase somebody else I don’t care, one for competition reasons, but two in theory, this levy rollback cause what happens through assessment being neutral, all the taxing districts have to roll back to levy rates and in my taxes stay the same. I say in theory, because this, the assessor maybe could argue that, Oh, it’s just for mobile home parks. And really it’s like, no, this should be all residential property, the same classification. And there’s no way that the assessor is going to double or triple the assessed values of a bunch of residential neighborhoods. So I’ve laid the groundwork. I am being polite at this point and I’ve complied with their documents, but I’ve put it in my supplemental document in there. This often works at a formal appeal. And if they get testy, you can start to say things like I’m going to beat you. I’m going to go one and over the years and go overwhelmed for the year. Do you really want to lose? Do you want to be public enemies? You’re going to be unfair, unjust, immoral. And sometimes that works too. If it doesn’t then boom, you got to go to the next level. The formal, you’ve already lost the informal. You’ve lost the formal. Now you go to the appeals court, which is in tax world is generally called like the board of equalization or the board of review. This is typically a group of volunteers or close to volunteer people who are going to review the assessor’s word versus your word. And it’s kind of like court, but very relaxed. And they may not be appraisers. They may be biased. Like they worked in the school district and their goal in life is to increase property taxes. If you go to the board equalization and you get to put on some evidence and sometimes you win sometimes you lose. Oftentimes you lose all these initial levels because it’s hard to change somebody’s mind and convince them that everything they’ve done in their life and their view of the world is incorrect.

And that’s typically how the smaller the town the more this is a problem. But if you lose the board equalization, then you have to appeal to the state tax commission and all of these processes have deadlines. You’ve got to watch them like a Hawk. They’ll generally be published and they’ll be in your bills and your notices and stuff like that. But check your mail and check your notice dates and calendar. So, you know, they don’t fall through the cracks, but the state tax commission, this is be more like a mini trial. And this is where it gets expensive. Most of the time you’re required to hire a real attorney. I guess if you have the property in your own personal name, you don’t have to, but let’s be honest. You’re smart enough by now to know that you don’t own a mobile home park in your own personal name, it’s in an LLC or some other entity. And if they’re an entity, then you don’t own it. The entity owns it and then you have to hire a lawyer and you also typically have to hire licensed appraiser to appraise the property. So you’re talking five grand minimum by the time you get to the STC and state tax commission. So that kind of stinks. And that’s just to like play the game. Now that you’re in the game, you’ve got to go through a little mini trial. There’s sometimes discovery, evidence, document sharing. There’s a little actual trial. Sometimes you write some briefs or pleadings of sorts depends on the state and the individual rules and some state tax commissions by the way, have more teeth and power. Like in Kansas, it’s called the board of tax appeals and it’s got more muscle in my opinion than the Missouri state tax commission, more legislative authority has been granted to them.

So you go to the state tax commission. I did one of these cases. One time I was representing the assessor in a different County than when I was assessor, but representing assessor. And it was on a Marianne hotel and we lost at the state tax commission and I was kind of a split, the guy just totally whiffed on it, but it kind of split, but we thought we lost, they thought they lost, both sides appeal. We go to the full state tax commission after that. This is in Missouri, this is a board appointed by the governor of three people. And then we go to them and they review the prior case at the state tax commission, hearing officer and hearings officer is a typically a lawyer kind of in a judge capacity. But, the full state tax commission board are political appointees. They may or may not be lawyers. They may or may not be appraisers. They may just be, you know, nephew of a Senator or something. So that’s the next step. Typically that’s most of them don’t really get to the full board review, but if they do, that’s kind of the last step for most everybody, if you don’t like your result, like on this Marriott hotel deal, we lost the full state tax commission, which we thought was garbage. So we appealed to the circuit court and that’s real court, right? This is when I just really hand it off because I’m not a litigator. I don’t really care to be a litigator. You get enough a-holes in one room and yell at each other and you become a litigator. So I try not to do that for, you know, stress and gray hair and everything. And I’m just not as good at it as some of these other folks. So I stay at a litigation game and stay in my lane of real estate.

So in this case, we actually wanted to search for it, well, the other side, the hotel, they appealed to the court. Well actually they appealed to the Supreme Court. The Supreme Court sent them down to go to the appellate court. First, we then won at the appellate court and that’s where it sits now, in theory, you could apply this bring court, but I think it’s pretty obvious that there, all of their arguments were wrong and all of my arguments were correct. So that was a cool case, had fun victory, but that was a big, you know, $15 million plus deal. A lot of mobile home parks, you’re talking 500,000 to two, 3 million bucks. It’s probably not financially worth it. I say, the juice ain’t worth the squeeze.

Unfortunately, so the assessor knows that sometimes too, sometimes the assessors can be difficult and just hard no hard, no stamped, no and dare you to appeal, but you do have rights. There are processes. It’s important to defend your rights as pertinent important though, like everything to continually evaluate, continually, I call it a cost benefit analysis. What’s the cost, what’s the benefit? And you do that analysis. You continually revise and review, revise and review. And if you’ve got to pull the plug, you pull the plug, you pull the plug. If you think it makes economic sense, and then also just general sense of like the brain damage and to go through and the opportunity cost of your time, then you should, you can go through with it and you can be very successful.

So as I mentioned in the prior podcast, there are some tactics you can use that are moral and legal to help mitigate your risk of having to do tax bill, but it doesn’t work. There are a number of options like looking at your comps, determining it’s fair and accurate understanding the assessment is revenue, neutral process, and then going through the informal formal in court appeal processes.

So I can give you a list of this, go to my website www.themobilehomelawyer.com, and you get a list of these processes and shoot me an email ferd@themhplawyer.com. If you’re looking for a referral or a reference, I might be able to help you. I might know something will help you, but I might not. I’m not going to talk about your specific case, unfortunately, because I’m not your lawyer. I’m just a mobile home park lawyer. And here today, signing off.

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