The Right Avenues to Lower Your Property Tax Assessment
March 30, 2023 | Joshua J. Malancuk, CPA, CMI, President
- Iowa commercial and industrial property owners are typically paying inaccurate property tax levels by as much as 20% to 30%.
- Don’t assume your assessment is correct, especially if you own a limited market (specialized) property.
- Iowa manufacturers pay some of the highest property taxes in the nation.
- Take action well before the April 30 appeal deadline to optimize your chance for relief.
It’s no secret that Iowa businesses pay among the highest property tax rates in the U.S. And their workers pay some of the nation’s highest property taxes on their homes. These factors greatly reduce the state’s competitiveness as a business hub. With the right planning, however, you can lighten your property tax burden and increase cash flow for your business in the process.
Like many Iowans, you probably sense your property taxes are too high, but it’s hard to know exactly how your business is being over-assessed or by what method. But your instincts are correct. About 80% of the time, we find that companies are paying at least 20% to 30% too much in property taxes.
As some of you know, Iowa is unique in that tax assessors re-assess property every two years (in the odd years). That means every two years you face the same fundamental dilemma: Is my assessment too high? What’s the true market for my property type? Are there errors in my assessment?
Since most companies don’t have the resources to answer those questions internally, they don’t have enough time to challenge their assessment through the protest or appeal process before the April 30th deadline. And so, the cycle continues for another two years. That’s what assessors count on. But you owe it to yourself and your team to keep your assessors accountable through available appeals and avoid overpaying your taxes year after year.
As a hardworking business owner, ask yourself the following question: “If I put my property on the market on the assessment date, what kind of sale price could I expect assuming normal market exposure (i.e., listing time for a broker to sale) and typical consideration (i.e., cash or cash equivalent realized with the sale)? That should be a great starting point for determining whether you are getting a fair shake on your assessed market value.
Here I will share three planning strategies that Iowa businesses have implemented successfully for tax savings: business:
- Appealing and reducing the assessor’s determination of market value.
- Leveraging unique classification errors for manufacturing-related fixturing.
- Taking advantage of pollution control exemptions.
Let’s take them one at a time:
1. Appealing and reducing the assessor’s determination of market value
If you suspect your assessment is erroneous, it’s important to file your appeal well before the April 30th deadline and start working the process ASAP. If you miss the deadline, you could be overpaying your property taxes for two more years because of how property taxes are invoiced in arrears.
Often, local assessors will have an “open book” period between mid-March and mid-April. If you have your case well-organized, you can usually talk with the assessor informally and sometimes bring resolution to the appeal without having to initiate a formal protest that starts the county board appeal or state property assessment appeals board (PAAB) appeal process. That’s why it’s so important to get your ducks in a row in the first quarter of the calendar year so you can build a solid case and hopefully avoid a lengthy path to resolving your appeal(s).
Once you file an appeal, the local county or city board will schedule a hearing within a week or two of when you filed. If that sound like a very short window, you’re correct. Your local and state government doesn’t want you to have too much time to prepare for your hearing. Most often you’ll be filing with the state PAAB board to start the proceedings as the local board process is not typically productive.
Manufacturers generally own industrial buildings, but if they have a headquarters in Iowa, they also own or lease commercial office space. It’s all about estimating the fair market value (FMV) of that property accurately. Granted, this can be a challenge, even by the most seasoned Iowa assessors and third-party appraisers.
Iowa assessment practices generally favor the sales comparison approach to value. It’s one of the primary methods to appraise commercial property, as spelled out with Iowa statute and historical appeal decisions. The sales approach is based on what you could reasonably expect to sell your real property for on the open market. In other words, what would a willing buyer and willing seller agree to with no undue influence as of the assessment date in question. The problem with the sales comparison method is that if you own a unique property (i.e., food ingredient processor, asphalt production facility, grain elevator, other large industrial plants, etc.) there may not be enough comparable sales from which to determine your estimated market value. So, it may be better to rely on the cost or income approaches (see below).
The cost approach refers to the replacement or reproduction cost new less market depreciation of the property. This may or may not be the same depending upon the age and design of your facility. Cost new can be readily determined by considering market surveys such as Marshall Valuation Service and/or recent construction costs of your property. Extracting depreciation from market data can be tougher to estimate since there are specific appraisal technics for identifying and quantifying all three forms of market depreciation – physical, functional, and economic obsolescence.
The income approach refers to how much income you could reasonably expect to earn for leasing the real estate to others less market level vacancy and collection loss and typical landlord expenses for operating the property such as repairs, utilities, management fees, administrative expense recovery, insurance, lease commissions to estimate net operating income (“I”). NOTE: comparable rents are typically evaluated and compared with actual rents to determine potential income).
Finally, the local property tax rate is added to a market derived ratio of income to value or cap (“R”) and then this ratio is applied to the net operating income to estimate market value (“V”) with the following formula: I/R = V.
The cost approach and income approaches may be more reliable depending on the property type and availability of market data such as comparable sales, cap rates, vacancy, and comparable leases. However, courts generally favor the comparable sale comparison method, so cost and income are typically used to corroborate what the Iowa assessors come up with via the sales comparison method -- or as a primary method for estimating value if sales are limited or non-existent for the specific market. Reconciling the three approaches is the last and most important step for estimating the overall market value of real estate.
Suppose your company owns a large food ingredient manufacturing building of 1 million square feet. I can assure you, there aren’t many facilities of that size in Iowa, much less many that have sold locally, regionally, or nationally. So, appraisers and assessors can possibly rely on developing a cost approach while also expanding their search for sales of similar properties that have sold in other states to replicate typical buyer motivations and market rates for acquiring such a property. National data is limited for this example property type and if identified, it would require in depth research to ensure that business going concern elements and other non-realty items (i.e., equipment, inventory, and other personal property) are isolated so only real estate influences are extracted from the transaction.
In summary, this type of analysis is extremely complex. It requires a seasoned valuation expert to interpret and apply the data appropriately. Don’t be a do-it-yourselfer here.
Other assessment relief strategies for manufacturers may also include reviewing their property tax roll for exempt property, such as pollution control property or business fixtures, which will be covered in the following discussion.
2. Leveraging unique classification errors for manufacturing-related fixturing
The Statewide Cooperative Case defines what was taxable vs. non-taxable in the state of Iowa. It came down to property that constituted integrated processing equipment – property that should be classified as exempt personal property instead of real estate.
To identify and pinpoint the classification adjustments, you want to review your entire manufacturing process from beginning to end and determine which fixtures are integral to your manufacturing process and which fixtures generally serve as realty (i.e., paving, fencing, rail, etc.).
3. Environmental protection exemptions
Many states, including Iowa, offer tax reductions through a lower assessment rate or a complete exemption for certain property that contains, monitors, or otherwise lowers environmental emissions. In Iowa, the buildings and other property that facilitate air or water pollution control will be permanently exempt and thus, removed from the tax roll once certified by the Iowa Department of Natural Resources (DNR) through an annual filing. Limited opportunities are also available for resource recovery activities as well.
Suggested approach to maximize savings
We suggest utilizing a seasoned navigator who is familiar with your property type and the Iowa appeals process to evaluate and document assessed value errors, proper classifications, and environmental protection exemptions. You can try to do the study yourself, but you’ll likely leave tax savings opportunities on the table and continue to overpay.
Here's what a typical work plan looks like in Iowa:
- Review and evaluate property data – by April 1.
- Evaluate initial assessment data and engage assessor via open book process – by April 15.
- If needed, file local appeals – by April 30.
- If needed, file state appeals – TBD deadline, typically due by end of May.
- Complete IDNR environmental exemption applications – by January 31.
- Post certification, complete county exemption applications – by end of February.
As you can see, there are several deadlines and filings to consider with a property tax evaluation plan. This becomes even more complex at the state PAAB level where rules of discovery typically apply. For these reasons, we recommend bringing in the experience!
As many of you know, tax rates in Iowa are two to three times higher than they are for many other jurisdictions in the U.S. If the assessor gets your assessment wrong, you could be overpaying by hundreds of thousands of dollars a year – even millions -- for several more years. Just remember, challenging an assessment and building a case on tight deadline can be stressful and complex. Don’t go at it alone. Let an expert help your company navigate the property tax review and protest process, so you can get back to doing what you do best – running and growing your business.
Josh Malancuk, CPA, CMI is President of JM Tax Advocates, a service organization who advocates for property tax reductions and maximum level incentives for leading Iowa manufacturers. He brings 28 years of specialized knowledge and experience to his clients. JM Tax Advocates currently serves on ABI’s tax committee provide input and collaborate on tax legislation. Josh can be contacted directly at firstname.lastname@example.org or at 317.674.8390x100.