Thursday, September 15, 2016

New Zoning Comes With Subtle Hidden Property Tax Benefits

Downtown Miami and Miami Beach are great examples of how major neighborhood revitalization zoning changes often result in significantly reducing the County’s taxable assessment value on “old building” structures.
In effect, a new Highest and Best Use (“HBU”) for the land has probably been created.   Developers will now be looking at properties in different ways.  With increased densities and taller buildings allowed, the value of the “land portion” typically become more valuable. Those values are now somewhat inversely related.
There is another little known benefit than can also occur.  In many cases, one can have a property with an old building actually generating income and at the same time (although somewhat of an irony), be able to explain to the Property Tax Assessor that the “building portion” (not the land), should NOT HAVE A TAXABLE real estate value. 
The only thing that should be taxed is the land portion, on which a tall new modern building should, and can be built.  As to the old existing structure, it may have instead become an “economic liability”, regarding its HBU.
As a building contractor, we often use zoning changes as an argument in order to get further reductions on property assessments.  I tell the Value Adjustment Board‘s (“VAB”) Special Magistrate that only “the land” (and not the building) has any type of economic value.     
A contractor developer, such as myself, would much prefer to start building on a vacant lot, as of day one.  When there is an old building, one would have to incur time, money and effort in removing tenants and dealing with costs for demolition and disposal of debris.  Also, although I do not know, I can tell the Special Magistrate that buildings of that age “might” have asbestos, which may trigger other problems, prior to any construction commencing.  After all, the County’s Property Appraiser has the obligation to “assess a property”, looking at it in two different ways:  (a) “As Built” and (b) “As Vacant”. 
This is sometimes in contrast to what an independent property appraiser may do, regarding their valuation of a property. That appraiser may be looking at the “Value in Use” or an income stream, which is important to them, especially if they have no plans on relocating..  
The definition of HBU encompasses four (4) tests:  the most probable use of the land or improved property that is (1) legally possible; (2) physically possible; (3) financially feasible and (4) which results in maximum profitability.  If the proposed use fails to meet any of these four tests, the County Property Assessor can then just assume that the existing old building structure is its present HBU, without changing their assessment. 
As long as the value of the property “As Improved” is greater than the value of the site “As Vacant”, the HBU is to keep the building.  But in our example (because of the changes in zoning), the value of the vacant land has exceeded the value of the property’s (including demolition costs) HBU and that will dictate that the improvement should be demolished. 
The County’s Property Appraiser, uses “Mass Appraisal” methodologies in arriving at property assessments.  Even though a building may have a construction cost factor associated with its ‘Value in Use”, it may no longer be applicable in that area regarding its “true” value.  
It is as if there was a form of “economic obsolescence” applicable to the building structure.  This is a type of depreciation that occurs outside the subject property.  In effect, the market (with its new zoning) is indicating there no longer is a need for an old structure.  Yes, the County’s Property Appraiser, may still recognize that there still is a building.  Instead of placing a zero value on the building portion, they may just place a “token” value of about $1,000 on the building portion of the total assessment.  This would also indicate that the true value is in the land and not in the old building. 
As to the land assessment, the market will dictate its value, based on supply and demand.  The Floor Area Ratio (“FAR”) will be a determinant as to the land’s potential and value.  Obviously, the land has more value to a developer if he can construct more units on a parcel of land.  This argument is used to show that the land value is its potential use (without the old building).  The higher the allowable FAR, the higher the value of the land.  But until the building is finally removed and demolished, the land will not be able to maximize potential value.
There is also a “Silver Lining” which the property owner should absolutely take advantage of.  This is something that most people who own land that has been rezoned, completely forget about.  It can represent thousands of dollars in property tax refunds to them.  Having an existing building may actually be a negative, which can end up being a positive, when the County refunds property taxes, because they assessed an old building, which will have no use to a hypothetical investor.
After all, with a significant zoning change, 100% of the value is in the land, not the building.  The property owner does need not have to have plans to demolish the building.  He only has to show that a “hypothetical buyer” would only want his property at all, if the old building can be demolished. 
The tax refunds are typically done with a Value Adjustment Hearing (“VAB”) in which a Special Magistrate hearing the case, will understand that the value concept of the HBU of the property, is its “land component” and NOT the building.   In a scenario such as this, it is as if someone can now actually “have his cake and also eat it”.  In effect, the building portion of the total assessment, will have NO TAXABLE value; although, and still generating income while it exists. 
Many of our clients are surprised that we were able to show that even though their building component of their assessment has either no value or a token value, they can still lease out the spaces and generate income.  Typically a land investor does not have income while he is “holding the property”.  In our case, someone can buy land downtown and plan on building in a few years.  Meanwhile, during all that time, he is also has an income that he can at least use to pay his property taxes on the land.
The County should not be allowed to “double-dip” on property taxes.  After all, only the land has the value for development purposes.  They should have only two choices.  If the County wants to assess for the value of an old structure, they should lower the land assessment value, as the land (which is not yet vacant) is then “handicapped” by having an existing building, unable to derive its optimum use of the land.. 
On the other hand, should the County decide to place a high tax assessment on the land portion, because of its future building potential (due to rezoning), then the building should have a “token” building, close to zero.  This is what we typically are able to accomplish with the VAB assessment petitions.  With a proper presentation, we explain that the building’s only reason for existing, is counting the days until it will be demolished.  Otherwise, the County will be taxing:: (a) a building with no economic value and  (b) the full value of the land parcel cannot be maximized.   
In summary, anyone who has a building in which there has been a major neighborhood zoning change should remember that significant additional financial savings may come their way by filing a well drafted property tax appeal with the Value Adjustment Board.  This is an example of that we do at Property Tax Appeal Group every day.