Source: http://www.azattorneymag-digital.com/azattorneymag/20150708?pg=47
Timestamp: 2018-12-17 14:34:08
Document Index: 333287327

Matched Legal Cases: ['§ 42', '§ 2', '§ 42', '§ 42', '§ 42', '§ 12', '§ 42', '§ 42', '§ 42', '§ 42', '§ 42', '§ 42', '§ 42']

competing resort down the street (which is currently assessed at $48 million).
In 2014, the out-of-state owner asked the assessor to consolidate the six parcels into one so the owner could pay a single tax bill. The assessor dutifully complied, and because there was a parcel consolidation, applied Rule B to the 2014 LPV. As a result, the 2014 LPV of the apartment complex increased from $26,382,750 to $32,740,224, thereby costing the owner $28,303 in additional taxes for 2014. Beginning in 2015, the increased cost to the owner for this “self-requested” Rule B adjustment will be in the range of $70,000 per year, because the entire tax rate will apply to the LPV, not just the primary tax as was the case in 2014.
An investor applied to a local bank for a loan to acquire and renovate an 18-unit apartment complex in Phoenix. An appraisal commissioned by the bank supported the acquisition price and estimated a stabilized value upon completion of renovations at $1,380,000. Because this was an income-producing property, the appraisal relied primarily on the income approach. However, the appraisal did not consider the effect of Rule B on the value of the property. Fortunately, the bank’s review appraiser was familiar with Rule B and recalculated the property tax estimate for the property set forth in the appraisal report. As the result of Rule B, the annual property tax estimate increased from $5,600 to $20,809, resulting in a substantial reduction in net income, and a corresponding reduction in appraised value under the income approach from $1,380,000 to
The bank’s loan commitment required a
debt-coverage ratio of not less than 1: 20
during the term of the loan. Without the
Rule B adjustment, the debt-coverage ratio
was 1: 23, well within the bank’s loan
requirements. But after the Rule B adjust-
ment, the debt-coverage ratio would drop
to 1:03, thereby rendering the loan non-
conforming. The bank declined the loan. If
the bank had made the loan, the subse-
quent application of Rule B to the property
tax assessment would have rendered the
loan in default due to a violation of the
debt-coverage covenant.
Strategies to mitigate the consequences of a Rule B adjustment are limited by two factors.
First, the Rule B ratio changes every year. As shown on the chart on page 41, the Rule B ratio for commercial property in Maricopa County changed from 78 percent to 98 percent in a span of three years (i.e., 2009-2011). It is very difficult to predict what the Rule B ratio might be from year to year.
Second, the Arizona Court of Appeals has held that a Rule B adjustment is lawfully made in the year when the assessor makes changes to the tax roll, but not necessarily in the same year that the change to the property occurred. 16 Thus, an owner cannot be assured that the Rule B adjustment will occur in a year with a favorable Rule B ratio. Rather, the assessor could defer the Rule B adjustment to a later year, with a higher Rule B ratio.
In addition, there are uncertainties in the Rule B assessment guidelines. The Assessment Procedures Manual published by the Arizona Department of Revenue states, “Rule B must be used when any new construction equals ten percent or more of the prior valuation year’s FCV.” 17 But the
1. Proposition 117 amends Article IX, Section 18 of the Arizona Constitution. The Proposition was codified by the Arizona Legislature under Laws 2013, Chapter 66, Section 9, amending A.R.S. § 42-13301.
2. Apologies to William Shakespeare.
3. Compiled Law of the Territory of Arizona, Chapter XXXIII, § 2 (1871).
4. A.R.S. § 42-17153(A). Peabody Coal Co. v. Navajo County, 572
P.2d 797 (Ariz. 1977).
5. A.R.S. § 42-17153(C)( 3).
6. BLACK’S LAW DICTIONARY, 1596 (rev. 9th ed. 2009) (emphasis added).
7. Property taxes are levied by the governing body of each county, city, town, community college district, school district, and often by special taxing districts (such as irrigation districts). The required property tax levy is then divided by the final assessed value of all real property in the taxing jurisdiction to compute the tax rate. The County Board of Supervisors extends that tax rate to the tax roll prepared by the County Assessor. The board assesses taxes on all property in proportion to its value. Tax amounts for real and personal property are tabulated by the board to complete the assessment. A.R.S. §§ 42-17151 and 42-17152.
8. There are currently nine classifications of property for tax purposes. A.R.S. §§ 12-12001 through 12-12009. The assessment ratio for each class of property is set forth in A.R.S. §§ 42-15001 through 42-15009.
9. Locally assessed property is property valued by the county assessor, as opposed to centrally assessed property valued by the Arizona Department of Revenue (such as mines, oil and gas interests, utilities, airlines, timber, pipelines and railroads.)
10. A.R.S. § 42-13051.
11. Id. § 42-11001( 6).
12. Id. § 42-11001( 6) and ( 7); A.R.S. § 42-17151.
13. Id. § 42-13301.
14. Id. § 42-13301(B).
15. See the discussion in the section titled “Planning Strategies” regarding the assessor’s discretion to apply Rule B to new improvements.
16. Premier RV & Mini Storage LLC v. Maricopa County, 215 P.3d 1121 (Ariz. Ct. App. 2009).
17. Arizona Department of Revenue Assessment Procedures Manual at 3. 3. 8 (Mar. 1, 2011).
18. For example, what type of improvements costing less than 10 percent of FCV should trigger a Rule B adjustment? Should tenant improvements or routine maintenance trigger such an adjustment?