How to break this vicious cycle and use the savings to reinvest in your business
Josh Malancuk of JM Tax Advocates recently did an interview on the podcast Exit Your Way with Damon Pistulka. Below is an excerpt of the interview. for the original postcast, visit https://jmtaxadvocates.com/2024/02/14/reducing-business-property-tax/
About 80% of the time, we find that businesses are overpaying their property taxes – and
they’re doing so by an average of 20%. I know that surprises many people, but it’s true. And
that’s a huge amount of money to be leaving on the table year after year.
Are you saying that businesses don’t just have to accept the assessment and
subsequent tax bill they receive from state or local government?
Most of the time, before we get involved with a business, the company controller is just
paying the property tax bill automatically and hopefully they’re paying it on time to avoid
the 10% penalty. Even then, they often miss that deadline, and then they’re sunk. When it
comes to business property taxes, our goal is to change the mindset from “pay the bill
automatically” to one that always involves a review process, accountability, filing protests
and working those challenges through county and state level government oicials. This
transformation requires a great deal of advocacy and negotiation to move the needle south
in terms of the property tax bill a company must pay.
Some states will also tax business personal property, such as furniture, fixtures,
manufacturing equipment and sometimes even inventory. Often the report on the property
will be filed by the company CPA with little question. By contrast, we question everything
we see in the assessment. We will question all the assets that the assessor claims the
company owns. We’ll look for ways to improve some of the reporting categories to increase
valuation depreciation and to lower the assessment as a whole. We’re sometimes looking
at tens of thousands of line items with a “boots on the ground” investigation approach. We
roll up our sleeves to make sure the company is not paying a penny more than they have to.
We’re also looking out for exposure – things like property that was omitted from the
assessment that may eventually subject them to under-underpayment penalties.
A different type of 80/20 rule
It comes down to looking for the right answer with everything that we do. Sometimes the
correct answer is: “Hey, you’re underpaying. You better get this fixed before you face an
audit.” As mentioned earlier, four times out of five, we find that businesses are overpaying
their property taxes on average by 20%. We correct that by conducting a very thorough
review and investigation that questions everything, that holds the government accountable
for doing the right thing, and that puts the business in a position to pay fair, accurate, and
equitable property tax amounts as part of their annual filing and annual reporting.
One of the most troublesome aspects of property tax and property tax management for
capital-intensive businesses is that overpayments don’t get fixed by themselves. Every year
that they have an overpayment and don’t fix it, that unnecessary expense keeps
compounding unless someone comes in to fix the issue properly. Think about a $50,000
overpayment that keeps recurring for 10 years. That’s ’half a million dollars your company
could have put back into its workforce, or used for business automation initiatives, or used
to fund part of the capital budget for a year. It’s a very heavy burden for businesses, but it’s
so often overlooked because many people don’t know what to do about property taxes or
how to fix the issues.
Talk more about the review and protest
Each state and sometimes every county within the state, has an appeal deadline that pops
up every single year to fix any errors in a business personal property return, along with the
business personal property tax filing deadline, and sometimes an amended return
deadline. Thirdly, there may be a business personal property valuation notice that must be
appealed by a certain timeline. In some cases, the window to file an appeal can be as
short as two weeks. By the time you get your notice in the mail, it may be too late to do
anything about it and thus, you're locked into your excessive property tax payment for an
entire year.
One of the most important things we do with a new client is to calendar out the anticipated
deadline to file an appeal. We also want to confirm whether it's a statutory deadline, which
means it's a fixed set date every year, or whether it’s a deadline that falls along in
conjunction with when notices are issued. Typically, these are completely dierent from
the tax bill itself. So, the property tax assessment notice will come out at a certain time in
the year for a company’s building and land assessment, and possibly with the personal
property assessment as well. It's up to the business --or the consultant that's representing
the business -- to make sure they're filing a petition form to keep that assessment open for
review, and change. If they miss the appeal deadline, there are extremely limited options
for gaining forgiveness if you miss the deadline -- often no options.
So, you must know your state. You must know the process for filing your petition. And you
must know the rules of the road once you file the petition. There are requirements to follow
to keep your petition “alive and kicking.” If you overlook those requirements, then your
appeal is done and there's no way to keep your petition open. It's just denied.
How can anyone outsmart the government or improve what our accountant already
handles for us?
A common misconception is that businesses think they can appeal their property taxes.
Actually, you cannot typically appeal your tax bill. You can only appeal your assessed
value which is a function of your tax bill. Again, if you miss your notice, you're typically
done. When you finally get your actual property tax bill, it may not be until a year later when
you suddenly realize your property tax bill has doubled. If you wait until you receive your
actual bill to challenge the amount, it's too late. You must get ahead of the process by
calendaring when that notice of value is coming out.
The formula for challenging your assessment will dier, depending on your state and your
property tax type. With real estate, for instance, you're almost always appealing the
assessor’s determination of fair market value. In other words, if you were to sell your
property as of the valuation date -- typically January 1 of the assessment notice year -- what
would be the anticipated price you could expect to receive in a willing-buyer/ willing-seller
environment?
There are a wide variety of appraisal techniques to estimate fair market value, including the
cost, income, and sales comparison approaches. There are numerous techniques for
applying each approach correctly, but they're all used to estimate value depending on the
property type. Business personal property is a function of what the states have typically
adopted for economic life multipliers and for depreciation multipliers for certain assets. It
could also be a function of what the state and/or county would tax. For instance, inventory
is not taxable in every state. You must understand that in some states, certain assets may
be taxed as personal property, and not taxed as real estate. In other states the same assets
could be taxed as real estate, because they are permanently aixed. When it comes to your
business personal property filing, there are many nuances involved just to get to the
starting point of what your reportable cost basis should be before you apply market
depreciation. Then you must calculate a value for that cost basis after applying market
depreciation.
Each state has its own way of taxing property. Even the type of property and what is
deemed taxable is state-specific as well. Beyond inventory, not every state taxes
equipment as part of business personal property. Certain states only tax real estate and
those states don't even require taxpayers to file a business personal property return. As you
can see, there is a great deal of variation between states, and you must really know what
your state’s priorities are, for what it is taxing your business, how to report correctly and
how to estimate more accurate values than the local government.
I can’t tell you how many times companies tell me: “Well Josh, our CPA, is taking care of
this for me.” What's typically happening is that CPA is filing the company’s business
personal property return (hopefully) on time. There's no review process (unlike when our
firm gets involved) and the company is left over-paying its property tax because it thinks it is
covered.
There are many reasons for this misconception. The first being the inexperience of a
generalist taking care of a very specialty area with a lot of nuances. The second is
credentialing. Many people don’t realize that in certain states, being a CPA is not enough to
challenge property taxes. You must also be credentialed as a certified tax representative
for property tax matters. In other states, you must be credentialed as a CMI (Certified
Member of the Institute) with the Institute for Professionals in Taxation, which carries
reciprocity. Each state has its own pitfalls when it comes to representation for property
taxes. If you don't carry that credential, you may not be able to practice in front of a county
board or state board for a tax appeal petition.
So, if your CPA firm doesn't have that kind of expertise on sta, it can only get you so far in
terms of challenging your property taxes. Sometimes, you need more than the CMI as well.
For instance, I also became a certified real estate appraiser, which required a lot of
supervision by a fee appraiser -- about 3,000 hours of doing appraisal work. It also required
a lot of credentialing, and about 180 hours of coursework with two levels of tests at the
state level. In terms of complexity and commitment, becoming a certified real estate
appraiser was comparable to getting my CPA license.
That was an exceedingly diicult road considering all the other demands of my practice
and family. But it was great training for learning how to estimate value and how to go
through an appeal process. It allowed me to put together credible market analysis to
determine whether a business should even file an appeal. Trust me, most accounting firms
and law firms don't have people on sta with that kind of valuation background or the
ability to undertake this type of study.
Who is most likely to be leaving serious money on the table when it comes to
overpaying property taxes?
If I'm a company CFO or controller whose bonus is tied to the P&L, I should be pretty well
incented to lowering the property tax bill if it’s a big line item on my P&L. Most people don't
realize that property tax can be the No.1 or No. 2 tax burden for a capital-intensive
business. I’d want to bring someone in who knows what they're doing and who can help
drive that line item downward.
The businesses that generally pay the most in property are manufacturers, senior care
operators, and real estate investment trusts that have large holdings of industrial property.
Oice buildings, hotels and resorts often have huge property tax bills as well – bills that can
reach into the millions of dollars. Meanwhile, utility companies can be faced with hundreds
of millions of dollars in property taxes because of all the power generation equipment
required to manufacture the energy and then drive it through their power lines or
underground telephone lines. Retailers can also feel a big property tax hit, too, especially
large malls. They must maintain mammoth enclosed spaces with large energy bills and
utility bills.
If you work for (or with) those industries, you really want to be paying close attention to your
property taxes and think about challenging it to drive those costs down. They’re a
significant part of the operating budget.
How does the appeal process work?
First, we assume the assessment is wrong until we can prove it right. We'll come in with our
eyes wide open and review the calculations from the assessor. Then we’ll do our own
analysis and modeling to see if the assessment is correct. In many cases it's not correct
and should be reduced. Of course, certain property types are more complex than others.
For instance, suppose you have a one million square foot manufacturing complex in a
small town, which is where your GMs, Fords, Hondas and Toyotas of the world are often
located. They like to locate plants in small markets because there’s a built-in labor force
and they don’t have to compete with lots of other companies for those employees in those
locales. If you’re a small-town assessor, how many other million square foot industrial
manufacturing complexes have you seen before? Probably none. So how are you supposed
to estimate the value for a property like that if you have no other transactional sales on
which to base your market value estimate?
In cases like these, assessors are stuck with an insurable value model, which is
replacement cost, less a linear depreciation methodology that almost always results in an
answer that is dierent from the true market value. So, they really have little hope of
estimating the correct value in this scenario.
Instead, when faced with a limited market property or limited transaction type property like
that large industrial manufacturing complex, the assessor should be expanding their
search for “comparables” beyond their county. They may have to look statewide, regionally,
or even nationally depending on how large the property is. That’s how our firm approaches
such cases. Ultimately, we're trying to replicate what the typical buyer would look like and
what their behavior would be, if looking to acquire such a property.
How many assessors have national comparison databases to estimate that value? Few if
any. But our firm does, and we pay a hefty premium every year to subscribe to all those
transactional databases. But it’s worth the money because it gives us a very good starting
point for determining an accurate evaluation.
So, you can kind of see the bigger the property is, the harder it is to value. The same is true
for certain other property types. When it comes to say, a senior care facility or hotel, it's
almost always a business sale when these properties change hands. In other words, not
only does the real estate change hands, but everything within it does as well. This includes
the business personal property, the name, and rights of the brand, etc. which represent a
franchise in an intangible value that goes beyond simply real estate. That intangible value
should never be taxed by the county assessor.
It's extremely hard to extract all of those elements of intangible value from hotel’s business
value. It involves a very complex model with years of training, industry experience and
credentialing, which most assessors don't have. Same with senior care facilities. If they
sell, it's almost always a business sale. There’s a lot of intangible value involved with
running a licensed nursing home that includes on-site therapists, on-site nurses, and a
team that knows how to maintain the license requiring certain service levels for all the
patients that stay in a skilled nursing site. There's a hefty intangible amount that is really
challenging to quantify, along with the facility’s real estate and business personal property.
These property types above are called “total asset value property types” and complex
modeling is required to unbundle all the non-real estate components just to get to the real
estate value. Whenever there's additional complexity, the chances of an assessor at the
county or state level missing the mark on the fair market value of the real estate is
extremely high. The value dierential can be as high as 50% to 70%.
When nursing facilities, resorts or hotels, sell the business along with the property,
assessors are likely looking at the business transactional value and using that for the value
of the property. But without the right expertise to assist a company, those miscalculations
and errors recur year after year until an experienced outside expert comes in to do a true
fix.
For example, we’ve been working with a senior care client for about 10 years. They have
approximately a dozen locations, and to date, we have saved them over $3 million in annual
property tax levels and that cumulative number is growing every year.
Once a correction has been made to an erroneous assessment, do you have to
start all over the following year?
It depends on the state, and it depends on the extent to which the business is expanding.
New construction will trigger a reassessment. Even remodeling may trigger a
reassessment. That's very important with hotels and senior care facilities because they
must constantly remodel to keep their businesses intact. If they do enough remodeling,
they're going to be reassessed and they’ll have to fight the value again in the year following
their construction project.
Keep in mind that each state has its own process for reassessment and their own cycle. In
some states like Texas, they reassess every year. In my home state of Indiana, we reassess
through trending every year. In Iowa, it’s every two years on the odd numbered years. In
Ohio, it's every three years and in Tennessee, it’s every four to six years.
So, you must know the nuances for each state, the trigger points that could cause a reval,
and whether a new construction project is going to trigger an increase. It’s not easy. And
whenever there's not an easy answer, it breeds chaos. That’s why you need someone to
come in and build that transparency to keep everything in check and to provide the
accountability that's so important. It’s really something we have to look at for our clients on
a yearly basis.
When you're a property manager, controller, or CFO with holdings in many states, it’s very
tough to stay on top of all of your property tax assessments because each state does its
own thing. You really need someone who can manage your portfolio and put a work plan in
place that covers your bases with respect to timing deadlines, appeal procedural rules,
credentialing, etc. that you need from one state to the next. There are a myriad of moving
parts and variables. It's an extremely challenging and complex process to do a portfolio
review to manage property taxes properly. The process is ripe for pitfalls. It's ripe for errors.
It's ripe for overpayments.
Essentially our job is to make sure that we're advocating for the best interests of our clients
and their businesses and to help them steer clear of those pitfalls. It’s also about staying
on top of the timing, the deadlines, and the way properties are valued in each jurisdiction.
Then we're navigating, the appeals or the amendments through to the end. We are
ultimately helping clients validate that they achieved savings as a result of settlement
activity or an agreed upon value by that county or state oicial with the final deliverable –a
revised tax bill, a refund, or possibly both.
How did you get into property taxes?
Anyone who tells you they went to school, thinking someday they’d become a property tax
expert is probably lying. There’s no coursework in college. There’s really nothing out there
about property tax, other than some trade associations. So, I had to chart my own path. I
started my career as a bored sta auditor in regional accounting. I knew early on I was not
cut out for a financial auditing career in which you’re working long hours, with lots of
overtime, with lots of travel, and with low percentage wage increases.
At the time, my employer had acquired a state and local consulting group that needed
someone to come in and intern to learn the trade. So, I thought to myself, I’ll try this out and
I discovered that I really liked working on projects to review property taxes. Early on, I was
able to make some pretty important presentations in front of city and county government
for some of the incentive requests. It was an unpredictable, trial-by-fire environment. It’s
not how training is done at traditional accounting firms, but it suited my entrepreneurial,
self-starter personality.
Almost three decades later I’ve stuck with this niche and become a property tax expert.
Again, this type of career path is not for everyone. There’s a lot of learning on the job, going
through the “school of hard knocks” and trial by fire. I was fortunate to have had great
mentors and learned the trade by working with a lot of great people in Big Four and regional
accounting firms in specialty practices. That experience exposed me to some of the largest
industrial and commercial taxpayers in the United States and I had the opportunity to help
deliver tax mitigation solutions to them.
What has kept you going after so many years in this specialized niche?
I enjoy saving people money. I enjoy adding value and I enjoy sharing knowledge that really
addresses a company’s need. I rarely run into a business that has an in-house property tax
expert or someone who can take care of an incentive negotiation without outside help. I
really enjoy training our clients, sharing what I know about these specialized areas and
essentially becoming a member of their team. I enjoy helping them navigate through all the
traps and pitfalls involved in property tax challenges and making the experience less
stressful.
For instance, you wouldn’t ask your general physician to do open heart surgery. So, why
would you want your generalist legal counsel or generalist CPA to take care of an area that
really requires a true specialist approach and a seasoned navigator to achieve the best
possible outcome?
Final thoughts?
If you're not paying attention to your property tax levels, you're wasting a lot of money as a
business owner or property owner. It's really incumbent on a company to question how
they're being taxed and even more so, to bring in someone with the experience, the
knowledge, and the wherewithal to take care of managing their property taxes wisely.
Otherwise, you're just leaving money on the table, and that can add up to a seven-digit-plus
impact over the years. By the time a company realizes how much they’ve been overpaying
it’s too late. There’s likely no retroactive relief on those back years. Hopefully, going
forward, they will implement a strategy to fix the bleeding and improve their bottom line.