Valuing Your Special Purpose Properties for Purposes of Property Tax Appeals

03/23/2016 / Timothy A. Rye and Mark R. Geier


The deadline for filing a property tax appeal this year is fast approaching: April 30. This article addresses a specific type of property that assessors have difficulty valuing and that is very common to manufacturers, processors and platers: special purpose properties.

In Minnesota, property taxes are based on the market value of the real estate. The term “market value” is generally defined as the usual selling price which could be obtained in an arm’s length transaction. In addition, the law requires that every property be valued based on the fee simple ownership interest, which means ownership without regard to any other interest or estate. For example, if a property is occupied under a lease, the assessor must make his/her valuation based on what the property could sell for in the market without regard to the lease.

While this valuation standard is fairly clear for most commercial property, it is often difficult to address for special purpose properties. Special purpose properties are those with unique physical designs, special construction materials, or layouts that are particularly adapted to the use for which it was built.

Manufacturers, processors and platers often meet that standard: for many, the design and construction of their facility is an extension of the manufacturing process itself. It is, therefore, unique.

These special purpose properties have substantial value to the operator of the facility, but at the same time, they may have a materially lower value in the general commercial real estate market. The reason: any potential buyers would either need to be able to use the property in the same manner as it is currently constructed, or they would need to make expensive changes to convert it to an alternative use. Of course, either of these outcomes makes the property less valuable to the general market and, therefore, should reduce its assessed value. Assessors are often not aware of special or unique improvements of a property.

Assessors face a second challenge, as well: They may not understand the components of the property, and what is assessable or not, especially when dealing with expensive capital equipment, fixtures, and personal property.

By law, assessors are not permitted to include the value of capital equipment, fixtures and personal property that are not defined as real estate in the valuation of property. All of these items are common to properties that are occupied by manufacturers, processors and platers. These properties contrast with warehouse property, where an assessor routinely recognize that racking can be unbolted and removed. But when dealing with a special purpose property, how does an assessor account for customized plumbing, processing and handling systems, and backup power, electrical or ventilation systems that are not movable and are built into the structure? How does it value special equipment or machinery that is part permanent and part removable? These are only a few of the questions that assessors either do not ask or cannot answer, but which have a very real impact on the property’s valuation.

There are an almost unlimited number of issues that can arise in determining what is taxable and what is not. The challenge for assessors is in understanding what is subject to property tax and how to value the property after disregarding non-real estate components.

This lack of understanding often leads to shortcuts and excessive assessed values. Assessors use mass appraisal systems for generating real estate values, which function best for properties that are commonly traded and have easy to compare characteristics. Properties that are unique are usually very difficult to find comparables for, and because of the mix of real estate and integrated equipment, assessors often do not have the correct facts. Without correct facts, the assessor will not understand what he/she is valuing, the valuation models themselves will not work correctly, and the value listed for tax purposes may have little or no relation to the fee simple market value as required under Minnesota law.

As a result, special purpose properties require a more hands-on approach in valuation for property tax purposes. A manufacturer’s best practice is to hire a property tax professional who is experienced in special purpose property valuations and can bring that hands-on approach to the assessor. These are a few of the questions to ask a property tax professional, when qualifying her/him to negotiate and appeal the assessed value of special purpose properties:

1. On a simple level, on an issue common to almost all manufacturers, how do you demonstrate to the assessor that a lease (which you probably need to disclose) should not influence the value of the property?

2. What experience do you have with manufacturing processes and the detailed but practical distinctions between the assessable real estate components, and non-assessable assets, such as capital equipment, fixtures, certain specialized systems and personal property?

3. What experience do you have in representing a variety of industries that use special purpose properties? The professional should be able to compare and contrast different types of special purpose properties in terms that the assessor understands.

4. How familiar are you with the assessor’s mass valuation models, and in explaining the weaknesses or errors of each of those models with respect to manufacturing, while presenting a strong explanation for the correct valuation?

5. Can you (the property tax professional) appeal property taxes yourself, and if you cannot, what leverage do you have with the county assessor if the assessor refuses to negotiate in good faith?

A qualified property tax professional will be able to earn the county assessor’s respect by understanding and discussing all of these issues articulately, and making credible threats to appeal.