Tax Appeal – A Settlement Strategy

Two Hilton Court

When the property owner, tenant, or manager of a commercial property authorizes an attorney to proceed with the filing of a tax appeal, they are actually opening up a new BILLING/DEBIT account for the attorney, especially when the fee agreement is based on an hourly rate. That is why owners/managers/tenants of commercial properties should be more proactive with their tax appeals.

Most tax appeal attorneys review the merits of the case prior to accepting the assignment. Once a tax appeal is filed against a municipality, discovery requests (interrogatories) are propounded, which both sides have to answer. Once discovery is completed the attorneys for the plaintiff or the municipality can then, if necessary, have an expert appraiser prepare a preliminary valuation for settlement purposes.

Settlement negotiations can begin at any time after the appeal has been filed. Property owners and managers of commercial portfolios should be less concerned about receiving a tax refund and more concerned with lowering their taxes going forward. Receiving a tax refund is always nice, but when the annual taxes are lowered the Market Value of the property increases dramatically. Case study – There is a two-year (2020 and 2021) pending tax appeal on a 100,000-square-foot office building that is assessed at $10,000,000 or $100 per square foot. The owner’s attorney feels that the assessment should be lowered by $2,000,000 to $8,000,000 or $80 per square foot. Using a 2.5% tax rate; a $2,000,000 reduction for each year results in a refund of $50,000 for both 2020 and 2021 or $100,000. The Township assessor/expert appraiser determined that $100 per square foot is correct. Most assessors look for a fair and reasonable range of values prior to settlement meetings. For instance, if both parties agree to withdraw all appeals and split the difference at $90 per square foot for the following year (2022) thereby lowering the 2022 taxes by $25,000 using a 5% return, it could conceivably increase the market value of the property by as much as $500,000. As you can see, the lowering of the tax assessment going forward increases the market value of the property for more than a refund in taxes would be for prior years.

In order to avoid costly trials and litigation costs, most municipalities are more inclined to lower the assessment going forward in order to avoid a refund of taxes for prior years so this type of settlement is a win/win for both sides. Sometimes a commercial property is sold with an unsettled tax appeal pending at tax court. That is unfortunate because the seller would most likely have been able to negotiate a higher selling price for the property had the tax appeal been settled prior to the sale and the future assessment and taxes been reduced.

Settlement of any case is a two-way street. Both sides should leave the settlement table saying they could have done a little better versus saying that they got the better of the other side. So owners and managers should be asking their attorneys to settle their tax appeals sooner than later and not seek a major refund; which most municipalities are not willing to pay anyway. The owners can always have their attorneys file tax appeals going forward.

They should also ask for a list of times that the attorney met or communicated with the tax assessor. They should ask “What are the offers and counteroffers between the municipality and their attorney to settle the case?” The attorneys are required to inform their clients of all significant development in matters that they are involved in or on behalf of the client. They are especially obligated to inform their clients of settlement proposals in order to represent clients in an ethical and professional manner. Failure to do so is not only unethical but is not in the best interest of the client’s desire to achieve a fair and equitable outcome.

As odd as it sounds, once a tax appeal is filed, the owner and the tax assessor or representatives of the municipality rarely meet to discuss settlement offers. Most owners and managers leave it up to the attorney to negotiate the settlement of the appeal. Although somewhat unethical, there is more incentive for the attorneys to prolong the case, so they can bill their clients longer than to settle the case. As of today, there are properties throughout the state that have unsettled tax appeals that are over ten years old. This makes the case even harder to settle because the refunds are usually too high for municipalities to pay. These older cases result in long drawn out and expensive trials and can go on even longer if either side appeals to the judge’s decision on the case. After a case is tried BOTH sides are usually unhappy with the judge’s decision anyway. Ultimately, both the taxpayers and the property owners lose when tax appeals are allowed to linger on for years without being settled. The COVID-19 full effect on commercial properties still remains unclear, but now is the time for owners to inform their attorneys to try to settle these cases.

As a professional, I have over 47 years of experience in the field of tax assessment. During this 47-year period, I have negotiated/settled tax appeals filed on properties that had a total assessed value in excess of $30,000,000,000.

Daniel S. Cassese, CTA, SCGREA is the Tax Assessor for the Township of Parsippany-Troy Hills