A real property tax appeal, particularly amid a distressed realestate market, presents a ready way to reset the municipality'sassessment consistent with the property's true fair market value.Where the market value of property plunges, the taxes associatedwith that property should naturally follow suit.

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That concept certainly has gained traction, as astute propertyowners filed an unprecedented number of appeals in 2009. Due tobudgetary constraints, most municipalities do not conduct formalproperty revaluations more than every 10 years. This does not mean,however, that local governments are unaware of the economic climateand its impact upon property values. As a result, taxpayers thatfile an appeal will likely benefit, either through consensualnegotiated settlements or by virtue of judicial decisions.

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Cole Schotz, for example, recently represented the owner of a138,000-square-foot distressed office building in Lyndhurst. Byimpressing upon the town that the property was plagued with an 86%vacancy rate and was in need of significant capital investment toimprove marketability, the town agreed to settle the matter byreducing the assessment from a value indicating $126 per squarefoot to $108 per foot. This multi-year resolution resulted in over$149,000 in tax savings for the proactive property owner.

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In January of each year, taxpayers receive a Property TaxAssessment Notice that identifies the assessments assigned toproperties for the current tax year. Making the assumption thatthis figure reflects the property's true value, however, can provean expensive mistake. In years when a town has conducted atown-wide revaluation--again, about every 10 years--the numbersshould match. As property values adjust each year thereafter,however, tax administrators will apply an equalization ratio, whichtakes into account the previous year's average sale prices whencompared to the average of these properties' assessments on thebooks. Only by applying this equalization ratio is a taxpayer ableto understand the true value dictated by the assessment number.

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In New Jersey, for example, the county tax administratordetermines equalization ratios by comparing arms' length salestransactions during the past tax year. If the average assessmentvalue on single-family homes is $1 million, for instance, and lastyear's average sale price was $2 million, the equalization ratio is50%. In reality, this process is more nuanced, as commercial,industrial and residential properties and vacant land are evaluatedseparately and a weighted average is utilized depending on theproperty type's relative relationship to the town property makeup.The administrator ultimately arrives at one equalization ratio forthe entire town regardless of the property at issue.

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It is therefore the assessed value, as equalized by theapplicable ratio (that is, divided by the ratio), that taxpayersshould compare to fair market value when determining whether tofile an appeal. If this equalized value does not reflect aparticular property's fair market value, the taxpayer will be stuckpaying higher taxes than are warranted. This overage, if leftunchecked, will compound annually as municipalities' tax ratescontinue to trend upward. Because the filing of an appeal alsocreates a risk that towns may seek a tax increase, through across-appeal, a preliminary assessment of value, conducted with theassistance of your attorney and appraisal expert, is criticalbefore filing.

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As soon as the property's current assessment is confirmed, byreviewing the Property Tax Assessment Notice, the owner--or atenant that bears the majority of the property taxobligation--should schedule an appointment with an attorney who isexperienced in commercial property taxation and who hasrelationships with professional appraisers. The attorney will thenbe able to perform, at no cost, the necessary preliminary analysisand determine whether an appeal has merit. If the appeal iswarranted, attorneys usually handle these matters on acontingency-fee basis--so there is no attorney fee unless taxsavings are realized.

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The appeal process itself is fairly straightforward. Filingdeadlines are critical, as they are jurisdictional in nature andtypically fall in or around the first quarter of the year--e.g.,Mar. 1 in New York and Apr. 1 in New Jersey. The necessary filingwill include basic information like address, block and lot and thecurrent assessment. A simple declaration that the property is beingoverassessed usually suffices, as the appraisal report/testimonywill ultimately form the crux of the case.

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Towns will typically settle if made to understand thatsignificant exposure exists or if the amount in controversyresembles the cost to defend. The municipality will also bemotivated to resolve the discrepancy in order to avoid budgetproblems in the future and to avoid the possible expense offloating bonds in order to fund sizeable refunds. Municipalitieswill usually negotiate resolutions that favor awarding taxpayerscredits against future tax obligations so as to avoid this verysituation. If an appeal is not settled, the current backlog ofcases means that a formal adjudication on the merits will not occurfor at least a year.

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For commercial properties, appraisal fees range from $3,500 to$10,000, plus hourly rates for appearances at settlementconferences or trial. Taxpayers can often manage these costs byhaving the appraiser prepare a less expensive summary-limitedreport for negotiation purposes, as the vast majority of casessettle. Taxpayers can also expect an attorney contingency feeranging between 25% and 33% of any tax savings actuallyrealized.

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Ultimately, pursuing a meritorious tax appeal means that ownersand/or tenants can ensure that they are paying only their fairshare of the municipality's tax burden and no more. A tax reductionalso improves the owner's net operating income and bottom line. Itadditionally makes the property more marketable, as a criticalcomponent of any prospective buyer's due diligence involves areview of a property's income and expenses and tenants willconsider the amount of taxes their prospective leases wouldobligate them to pay.

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Carl A. Rizzo, Esq. is a partner with the law firm ColeSchotz, with offices in Hackensack. He is a member of the firm'sCommercial Litigation department and co-chair of the Real PropertyTax Appeal subgroup. He can be reached at 201.525.6350 [email protected]. The views expressed here are the author'sown.

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