Property taxes should reflect the value of the real estate being
taxed, not the needs of governmental entities that share in the tax.
However, assessors are under increasing pressure to maintain or
enhance property tax revenue. The result is a growing and improper
tendency by assessors to use the success of the enterprise occurring
in the real estate as an indicator of taxable property value.
Value is the amount a willing and knowledgeable buyer would
pay a willing and knowledgeable seller to acquire a property as of a
certain date. This simple concept has engendered volumes of
appraisal books, hours of testimony and
endless discussion of how to segregate
the real estate component from the
whole of an enterprise.
property is available for a buyer’s use on
the date of sale. For value purposes, any
enterprise carried on within the prop-
erty is absent on the date of sale. The
buyer is not buying the business or any
part of the business, only the place where the business operates.
The success of the business is independent from the property
in which it operates; to approach valuation otherwise leads to
invalid and inequitable results. An example would be a building
designed and used as a single-screen cinema. One week it fea-
tures a popular and highly promoted movie, and during that
week the ticket sales are great. The theater is full and ticket lines
extend outside for each showing. The following week the movie
house runs a bad film, and ticket sales are low or non-existent.
To include enterprise value as a component of the value of the
real property is to say the theater building is worth more the week
it shows a popular movie than when it screens a flop. Meanwhile, a
retail building is no more than a structure in which goods enter
from the loading dock and exit the front in customers’ hands, leav-
ing money or credit behind. Effectively, the building is a conduit
for an activity which could occur anywhere in that submarket.
There is little doubt that successful operations will garner higher
property taxes than weaker businesses, which is unfair. To some
extent, the assessor punishes the taxpayer for a successful enter-
prise, all too frequently raising the concept of sales per square foot
as justification. This rationale also applies to big box national retail-
ers as well as your local mom-and-pop barbeque joint.
Some businesses require government licenses, which may be
site-specific and limited to certain people or entities. They do busi-
ness in properties of specific design that are not easily modified to
other uses. Bank charters and licenses for liquor sales or casino
gambling are limited to specific facilities at a specific location.
What value do these properties hold after the business leaves? Pull
the license off the walls, now determine the value of a building that
once was one of these enterprises. So, when the old home-town
bank building no longer houses a bank, what is it worth?
By law, the former bank building is worth no more or no less
than when a bank operated there.
To value it in use is to value the banking activity that occurred
there. Taxing business activity isn’t an element of property tax at
all; it is an enterprise tax, impermissible and unauthorized by law.
Brick-and- mortar retailers are under attack from ecommerce,
and the public is subjected daily to photos of dying malls and
struggling shopping centers. It is widely accepted that the value of
a shopping center drops when the anchor tenant vacates. But the
taxable value should be unchanged, because the hypothetical
buyer is purchasing a property ready for occupancy.
The prosperous business should not be punished for its success
by the improper valuation of the place where the success hap-
pens. Dealing with the assessor, the owner must argue that taxable
valuation is based on the property being vacant. That means the
current occupant is presumed gone on the date of sale.
Any other approach values the enterprise occurring there.
Jerome Wallach is a partner at the Wallach Law Firm in St. Louis. He
may be reached at firstname.lastname@example.org. The views expressed
are the author’s own.
Value the Dirt or the Dollars?
By Jerome Wallach
excess of 60,000 beds. We would still advise close scrutiny on the
upper end of the market, as almost all new deliveries are at top-of-the-market rents.
Dolce: What will be the most desirable types of student-housing properties in 2018, and how has this changed?
Pierce: Beauty is in the eyes of the beholder. Student housing
product has now become more stratified than ever, which offers a
little something for everybody. If you want to be immediately
pedestrian to campus and are willing to pay top-of-the-market
rent, there are new mid-rise projects to fit that bill. If the student
is more price sensitive, but still wants their own bedroom and
bathroom with best-in-class amenities, there are “drive” properties with dedicated shuttle service at really attractive rents. If the
student wants to live in a house, cottage is what they choose.
All of these represent good investment opportunities, but with
somewhat different risk and return considerations. There are also
ample opportunities for value-add investing. All of these types of
student housing investment opportunities will continue to be
available in 2018.
Dolce: Are there any untapped opportunities out there for student-
Pierce: The real opportunity is to allocate a portion of their portfolio
to the niche sector of student housing which can produce out-sized
returns, while also offering diversification benefits. Student housing
has proven to be a recession-resistant asset class and its perfor-
mance is not highly correlated with the economy, nor multi-family.
We are seeing more and more institutional investors deciding to
construct their multi-family portfolio with a portion (10-20%) in
student, a part (10-20%) in senior and the balance in conventional.
I expect this trend of dedicated allocations to student housing to
grow and diversifying in this manner will produce higher risk
adjusted returns for an investor’s real estate portfolio. ◆