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Commercial property owners file wave of tax appeals

Arizona residents and business owners who have seen their property values drop significantly during the past few years have filed what’s expected to be a record number of appeals to challenge the valuations – and their tax burdens – set by their county assessors.

The average commercial property is worth far more than most homes, so the stakes are higher when a business owner files an appeal in an effort to lower the amount of taxes owed on the property. A successful appeal of valuations this year means lower taxes when bills are distributed next year.

The trend toward more appeals is occurring statewide this year. But in Maricopa County, the number of commercial property owners who have filed appeals increased by 31 percent compared to 2008, according to statistics provided by the Maricopa County Assessor’s Office.

Residential appeals in Maricopa County rose 17 percent during the same period. There were about 20,000 total appeals filed in the county this year.

Gradual reductions in commercial values were seen in 2006 and 2007. But after the fall of the housing market, commercial property values also started to drop. Precipitous declines began last year when the stock market crashed, said Darren Webb, a commercial tax consultant and board member of the Arizona chapter of the National Association of Industrial and Office Properties.

The collapse eroded capital reserves necessary for lending, and drastic job losses erased consumer demand for rentals of retail, office and industrial commercial properties, Webb said. As a result, lower market values for commercial property have led many business owners to second-guess the valuations by county assessors.

Property owners who want to challenge their valuation must first appeal directly to the County Assessor’s Office, which sets the valuation in the first place. In most cases, the assessor rejects the appeal.

Property owners who are dissatisfied with final valuation decisions by the county can appeal to the State Board of Equalization. The state board was formed to conduct hearings for valuation appeals from Maricopa and Pima counties, but it also handles appeals from several of Arizona’s rural counties.

This year, the board expects to hear 16,000 appeals of property tax valuations distributed in February to owners of residential, commercial, and other properties such as farms and vacant lots. That tops last year’s total number of appeals by 21 percent.

“It’s crazy,” said John Greene, chairman of the State Board of Equalization and a former state lawmaker. “What’s happening is what we thought would happen. We’re inundated.”

Despite the drop in commercial value, property owners and their consultants are finding it difficult to convince the Maricopa County Assessor’s Office to reduce the valuations.

This year, only 11 percent of the approximately 9,000 appeals of commercial values resulted in any lowering of the county’s appraised values. The statistic is about average when compared to commercial valuation appeals results during the past four years, but it pales in comparison to a 21 percent reduction rate in 2005 and a 28 percent reduction rate in 2004.

Les Abrams, president of the Arizona Association of Property Tax Agents, said the steep rise in Maricopa County commercial property assessment appeals is due to owners challenging their assessments based on an income approach, a valuation tool he summarized as the “ability or inability of a property to produce income.”

Webb, the tax consultant, said county assessors use a mass appraisal approach that relies on the prior year’s market conditions, which does not accurately reflect values of individual properties. “It’s a shotgun approach,” he said. “And if the taxpayers are looking at it, they’re looking at it from a surgical approach to a specific property rather than trying to throw a market value out for everything.”

Joy Gomez, a commercial tax consultant, said the low percentage of reductions is due to the county’s reliance on computer-assisted valuations and a natural tendency to protect the office’s assessments. “There is a seeming lack of coordination or a sanity test of the commercial values coming out of the Assessor’s Office,” she said. “They are trying to automate and they’re doing a lot of things through a computer, but there is nobody at the end of the day looking at the computer and then looking at the building to see if the two are making sense.”

County Assessor Keith Russell said the rise in appeals is a result of people seeking to cut expenses during a struggling economy. He said his office’s decision to overturn about 11 percent of the valuations it sets – which includes only those that are appealed, not all property assessed – is “fairly consistent” with historical levels.

“We’ve got about a million-and-a-half parcels, and we get about 20,000 appeals every year,” he said. “That’s a pretty low percentage to start with, and overall I think it means we do a pretty good job with the
values we are generating.

“But just because somebody gets in the door doesn’t mean a reduction needs to be made. Every appeal needs to stand on its own merits.”

Last year, though, commercial property owners were almost five times as likely to achieve a reduction in valuations – and their subsequent property taxes paid in 2009 – from the State Board of Equalization than they were from the Maricopa County Assessor’s Office.

Paul Peterson, a spokesman for the Maricopa County Assessor’s Office, said the low percentage of reductions from the county is understandable, as property owners are asking a government agency to reverse its own decision. He said “mom and pop” business owners are ill-prepared to navigate assessment methods and appeals.

“We’re here to defend the value,” Petersen said. “There is a big difference between an error, which needs to be corrected, and a difference in a judgment call, which is what a valuation can be sometimes. Because of the way the system is, the initial judge of who is right and wrong is the very person who decided the value.”

Earlier this year, Russell was among a group of county assessors who requested that state lawmakers assemble a panel to study ways to improve Arizona’s property tax system.

Russell said he would be interested in examining the built-in time lag that uses 21-month old market conditions to establish property tax rates and the creation of a longer time period for assessors to handle
appeals. “I get to see this part of the process up close and personal,” he said. “But I’m only part of the entire process.”

- Reporter Sarah Macdonald contributed to this article.

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