4350.1 REV-1

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CHAPTER 23. REAL ESTATE ASSESSMENT AND APPEAL

SECTION 1. INTRODUCTION

23-1. Impact of Real Estate Taxes. Real estate taxes can

have a significant impact on the operating costs of

multifamily housing projects. To keep costs as low as

possible, HUD directs its staff and project owners to

follow strict guidelines to ensure that taxes assessed

and paid are correct and that the project takes full

advantage of any tax exemptions and abatements

available.

23-2. Overview of Owners\' Responsibilities. Project owners

have primary responsibility for utilizing all available

tax reductions and appeal processes. Section 2 of this

Chapter lists guidelines to which owners should adhere

throughout the year \-- especially when preparing

financial statements. For more information on the tax

process and tax appeals in general, see Sections 4 and

5\. For more information on types of available tax

reductions, see paragraph 23-14.

SECTION 2. OWNER RESPONSIBILITIES

23-3. Accounting Procedures. Use the procedures set forth in

HUD Handbook 4370.2, \"Financial Operations and

Accounting Procedures for Insured Multifamily

Projects,\" to maintain books and accounts for mortgaged

properties in order to permit speedy and effective

audits (tax assessments and payment of new tax bills

are an integral part of those requirements).

23-4. Prompt Payment of Taxes. Make payments to the proper

taxing entities at the specified time in order to

prevent the imposition of penalties or tax liens

against the property. Also, take advantage of the

discounts that some taxing jurisdictions provide for

early payment.

23-5. Tax Review and Appeal. Review each tax assessment and

appeal it, both retroactively and prospectively, if you

find it is in error. If there are expenses associated

with the tax appeal process, the owner must evaluate

these costs before incurring the expense.

A. Review the tax calculation for mathematical errors

or overvaluation of property (e.g., 236 projects

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4350.1 REV-1

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are often overassessed because tax assessors base

their values on market rent levels instead of

basic rents).

B. Review and question a substantial tax increase

with the taxing authority.

C. Ensure that the project is utilizing all

appropriate State and local tax relief provisions

available for subsidized, elderly, or low-income

housing. The Field Office may provide information

on State and local laws granting tax exemptions or

abatements at the owner\'s request.

D. Explore the possibility of making payments in lieu

of taxes (PILOT), as this procedure may reduce

total tax payments.

E. If already making payments in lieu of taxes,

compare the negotiated PILOT and the tax

assessment to ensure that the PILOT does not

exceed the amount that would be paid through the

regular tax process.

F. Examine records to determine whether the tax

assessment is based on a value in excess of the

current market value of the property. This may be

the case if any of the following conditions exist:

1\. The project\'s value has been adversely

affected by local economic conditions;

2\. The project has experienced accelerated

obsolescence due to nearby modern

construction and/or changing neighborhood

characteristics;

3\. Gross rental income has been adversely

affected by rental rates in competitive

projects, or other similar factors;

4\. Actual and/or estimated annual operating

expenses are high in comparison to annual

income;

5\. Taxes represent a disproportionate percentage

of operating expenses; and

6\. The tax assessment is based upon the

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4350.1 REV-1

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project\'s gross revenue which in turn is

based on HUD assisted rents that may exceed

market comparison rents.

Note: Some communities will agree to base an

assessment upon rents that are below market

rate (i.e., basic rents). For example,

Section 236 market rents may be higher than

the rents charged for other comparable

unassisted apartment units because of

marginal locations, inappropriate design, or

other factors. Therefore, to avoid

overvaluation of the property due to reliance

on market rent, use the gross income for

assisted projects based on basic rents. This

estimate would result in a lower real estate

tax on the property.

G. If necessary, obtain aid in the review process

from the Field Office as specified in paragraph

23-9.

23-6. Professional Assistance in Appeals Process. Apply for

all tax reductions available, utilizing professional

assistance when necessary according to the following

guidelines:

A. When possible, utilize the services of the

management agent, as opposed to outside

consultants, in the tax appeals process.

B. If an identity of interest exists between the

consultant or management agent handling the appeal

and the project owner, follow the procedures

outlined in HUD Handbook 4381.5, \"Management

Documents, Agents, and Fees.\"

C. Adhere to the following guidelines in compensating

the management agent or consultant:

1\. When possible, compensate the professional

for his or her assistance on a contingency

basis.

2\. If a professional is not available on a

contingency basis, the cost and potential

benefits must be evaluated prior to going

ahead with the appeal. The professional\'s

fee must be cost effective and may not exceed

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4350.1 REV-1

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the potential tax reduction.

3\. If a retroactive tax reduction and refund is

received, fees charged for an appeal may be

paid from this refund.

4\. If no retroactive refund is received, the

expense incurred may be paid out of project

income if the reasons for seeking the

retroactive refund can be justified by

documentation.

23-7. Rent Increase Requests. When applying for a Budgeted

Rent Increase, the project owner is required to provide

a certification which states the following: \"The

project has received or requested any tax relief for

which it is eligible and management has analyzed the

project\'s property tax bills and appealed any

assessments which appeared unreasonable\". This

certification is provided in chapter 7 of this HUD

Handbook.

When applying for a Special Rent Increase under Section

8, the project owner must submit supporting data to

justify a special adjustment for rent to cover an

increase in property taxes.

23-8. Cash refunded to the Property (tax appeal), Cash

refunded can be used to reimburse fees as stated in

paragraph 23-6, C3. All other cash must be deposited

into the residual receipts account.

SECTION 3. FIELD OFFICE RESPONSIBILITIES

23-9. General. The following responsibilities should be

carried out by the Loan Management Branch:

A. Maintain tax roll data files in the MIPS system

and use this information to evaluate a project\'s

present year taxes. Review of MIPS data is part

of the budgeted rent increase approval process.

B. A HUD representative may appear at regulatory

proceedings for the purpose of advising taxing

officials of the nature of subsidized housing.

23-10. Income and Expense Analysis. Implement the following

procedures as part of periodic income and expense

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4350.1 REV-1

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analyses of HUD-held and HUD-insured projects including

coinsured and formerly coinsured projects:

A. Request from the owner or mortgagee a copy of the

most recent real estate valuation for tax purposes

issued by the local taxing body.

B. Conduct a preliminary comparison of the project\'s

three prior year\'s real estate tax expenses as

reflected on Form HUD-92410, Profit and Loss

Statement or 92558, Income and Operating Expense

Analysis. Compare these recent valuations and

assessments to those of similar projects within

the same taxing jurisdiction.

NOTE: When reviewing financial statements for

Section 202 projects, verify that the project was

processed with the same tax status that the

project currently claims. In some cases, owners

of Section 202 projects may need to reapply

annually to retain tax exemptions or abatements

established in initial processing. For more

information, see HUD Handbook 4571.1 REV-2. Also,

review project\'s file to see if owner signed form

number 1708 entitled: Agreement for Payment of

Real Property Taxes by Sponsor.

C. If tax assessments for the property appear

reasonable, take no further action. If, however,

the most recent assessment represents an excessive

increase or is inequitable compared to assessments

at similar properties, recommend to the owners to

appeal the assessment. However, it is the

responsibility of the owner to evaluate the cost

benefit of appealing taxes and to decide whether

or not to appeal taxes.

23-11. Rent Increase Requests. Implement the following

procedures when owners apply for a Budgeted Rent

Increase or a Special Rent Increase under Section 8:

A. Review the project\'s tax expenses in the manner

specified in Section 2.

B. Ensure that the owner provides the proper

certification in the case of a Budgeted Rent

Increase, or the owner provides supporting data to

justify the request for a Special Rent Increase.

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C. If a Budgeted Rent Increase or a Special Rent

Increase under Section 8 is requested while a tax

appeal is pending, process the rent increase on

the basis of known expenses. If an appeal is

granted, the rent increase will be recalculated to

reflect the net tax savings.

SECTION 4. THE TAX PROCESS

23-12. Basic Factors. Many states provide some form of tax

relief for subsidized housing. Tax policy and

procedures vary from State to State and locale to

locale. The basic factors involved in the tax process

are described below:

A. Real Estate Taxing Bodies. Assessments on real

property are levied by various governmental and

quasi-governmental taxing bodies to raise revenue

for performance of various public functions. More

than one taxing body may levy assessments on

parcels of real estate located within a political

subdivision. Taxes on real estate may be levied

by State, county, city, school district, and

special districts including community colleges,

hospitals, public utilities, libraries, etc.

Properties with mortgages insured and held by HUD

are subject to local assessments.

B. Collection of Taxes. The logistical aspect of the

collection of taxes varies from State to State and

from one taxing jurisdiction to another.

Frequently, one taxing jurisdiction services

several taxing bodies from a single collection

office. Conversely, several collection offices

may service a like number of taxing bodies within

a locality. Payment to the proper taxing entity

at a specified time prevents imposition of

penalties or tax liens against a property.

Mortgagors and mortgagees also should be sensitive

to the payment of taxes in those taxing

jurisdictions that provide discounts for early

payment.

C. Personal Property Taxes. Personal property taxes

may be included as part of tax bills on real

estate.

23-13. Types of Appraisals. All property within a taxing

jurisdiction should be valued or appraised uniformly

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4350.1 REV-1

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and taxed according to a uniform rate based upon

appraised value. Each taxing jurisdiction is required

to establish administrative procedures that will assure

both the proper valuation of properties-parcels within

the jurisdiction and their uniform assessment. Local

assessment officers use several standard approaches in

conducting an ad valorem appraisal on each property.

The term \"ad valorem\" refers to a tax which is measured

by the property value. An ad valorem tax appraisal is

an appraisal at market value and/or a percentage of

market value (ratio) of properties-parcels of real

estate within a city, county, or other political

subdivision of a State. A short explanation of the

standard approaches to conducting an ad valorem

appraisal follows:

A. Market Approach. Both the market approach and the

income approach are of great importance, as most

abatements are accomplished by using one of these

methods. For both market and income approaches,

the assessor compares and makes the necessary

adjustments to arrive at a fair and equitable

market value of the HUD-held and/or HUD-insured

property. The four steps of the market approach

are:

1\. Select sales of comparable properties;

2\. List the sales;

3\. Adjust sales to the subject property; and

4\. Correlate results and estimate value of

subject.

B. Income/Capitalization Approach. The

income/capitalization approach is an appraisal

technique designed to determine the present worth

of future net income. Through this approach, a

property\'s income stream (the income which a

property produces in rent month-by-month and/or

year-by-year) is converted into capital value.

Often when assessed values are appealed, the

appeals body requires an explanation of the

income/capitalization approach taken to arrive at

the assessment. Thus, owners should investigate

the particular income/capitalization approach

employed on their property and be ready to explain

the approach to the appeal body. The basic steps

of the income/capitalization approach are:

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4350.1 REV-1

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1\. Determine/estimate annual gross income

(potential or actual);

2\. Deduct vacancies and/or rent loss (estimate

or actual);

3\. Estimate operating expenses;

4\. Select capitalization rate;

5\. Select rate of capital recapture;

6\. Select technique to use in converting net

income into capital value; and

7\. Compute the indicated valuation.

C. Cost Approach. In most cases, the cost approach

will have little bearing on abatement procedures

on HUD-held and HUD-insured properties. The four

steps of the cost approach are:

1\. Value land as though vacant;

2\. Estimate cost of new improvements equal to

those actually built (this is called

\"replacement cost\");

3\. Estimate and deduct accrued depreciation

based on age of existing improvements; and

4\. Total the land value and improvements.

23-14. Types of Tax Reductions. Property owners should apply

for all available tax reductions both retroactively and

prospectively, as reductions for both time periods may

be available. The four basic types of tax reductions

include:

A. Full Exemption. Some jurisdictions grant full

exemption from taxes to particular types of

projects, e.g., nonprofit projects.

B. Reduction. A jurisdiction may reduce a project\'s

assessment because of the status of the property,

e.g., nonprofit, elderly, and subsidized projects.

C. Payment in Lieu of Taxes. Jurisdictions may allow

subsidized projects to make payments in lieu of

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taxes (PILOT) instead of full payments.

D. Incorrect Assessments. Jurisdictions may compute

assessments incorrectly either because of

mathematical errors or through overvaluation. A

downward adjustment to an incorrect assessment

will result in a tax reduction.

SECTION 5. APPEAL OF REAL ESTATE ASSESSMENTS

23-15. General Information. Assessment officers employed by

local taxing bodies are responsible for the initial

determination of real estate value. Their

determinations, however, are subject to review by

property owners, by the taxing bodies themselves, and

by higher administrative and judicial bodies.

Frequently, a body of reviewing officials is called a

board of review. Upon appeal from a property owner,

local review or equalization boards are authorized to

either change the value of specific properties or alter

the relationship between values of groups of

properties. Procedures for appeal are not uniform

among localities or states. In most instances,

however, appeals progress from an informal review at

the local taxing office to a formal review at the local

board of equalization or the State tax appeal board.

If a property owner does not gain the relief he seeks,

he may appeal for relief through the courts.

23-16. Basis of Appeal. When a property owner believes his or

her real estate assessment to be inequitable he or she

may choose to lodge an appeal with the local taxing

body or to engage the services of an attorney and/or an

expert real estate appraiser in accordance with

paragraph 23-6 who will prepare the appeal.

A. Such appeals are generally based on the following

contentions:

1\. Overvaluation

2\. Inequality

3\. Illegality

B. The majority of appeals are based upon grounds of

overvaluation. Contention that an assessment is

based upon overvaluation or inequality may be

supported by the findings and testimony of an

expert appraiser. Illegality must be contended

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with the aid of an attorney.

23-17. Appeal Assumptions.

A. Administrative and judicial bodies charged with

reviewing tax appeals are guided in their

decisions by the following assumptions:

1\. The local assessor\'s valuation of the

property is correct until proven otherwise.

To counter this assumption, property owners

must themselves, or with the assistance of an

expert witness, demonstrate the methods by

which they arrived at a different valuation

estimate. A witness must prove his or her

right to be qualified as an expert.

2\. If capitalized income results in a higher

valuation than replacement cost, then

replacement cost will be accepted as closer

to market value.

B. Administrative and/or judicial review boards rely

on the local assessor to supply all data upon

which the original assessment was made.

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9/92 23-10