Post-Covid: How to Avoid Excessive Property Tax Appeal Fees
When tax appeals increase due to challenging conditions such as Covid, the tax appeal consultants and attorneys, who represent property owners, benefit by an explosion in fees.
It is time to change that.
Writes Bill Quinn, a veteran tax appeal industry insider

Commercial real estate (CRE) owners and asset managers of all property types typically review annually and appeal, when warranted, real estate taxes by challenging the value assessed by local governments – so CRE owners are well versed with this opportunity of lowering property taxes. In the aftermath of every real estate downturn or crisis, real estate tax appeal consultants and attorneys extol advice to the CRE industry on “mitigating the fallout by focusing on appeals” and valuation diminution insight such as “obsolescence” issues. The primary reason for this spike in communication from tax appeal intermediaries is because a bubble in tax appeal fees is about to occur. And they are after their slice of this appeal fee pie.

2021 Expected Spike in Appeals

The deleterious effect of Covid on CRE value has been well established via many articles and virtual conferences. For example, as of September 17, 2020, Equity REITs (FTSE, Nareit) posted a negative 16.5% return during 2020. Clearly this doesn’t tell the whole story as some sectors have performed much better than others.

In an average market, about 25% of a portfolio might have merit for a tax appeal. Most jurisdictions utilize a January 1 valuation date and will not consider the Covid impact as of January 1, 2020. January 1, 2021 is the first valuation date CRE owners will have to appeal their real estate taxes while considering any negative impact on value attributed to Covid. It is expected that for 2021, 80% of the properties will likely have tax appeal merit. Now is the opportune time to reevaluate how to lower real estate tax appeal fees for 2021.

Excessive Appeal Fees

There is a real estate tax appeal industry, which consists of consultants and attorneys who appeal government established real estate values on a contingency fee basis. The mathematical product between an assessor value and a real estate tax rate usually makes up the bulk of, or entire, real estate tax bill. The typical fee charged for a tax appeal is 20-25% of the tax savings in low tax (e.g., 1% tax rate) jurisdictions and 10-15% in high tax (e.g., 2% plus tax rate) jurisdictions. These contingency fees equate to hourly compensation in the thousands of dollars.

Imagine receiving an invoice for a property that reads: “12 hours at $5,000 per hour = $60,000”. Who wants to pay an invoice based on $5,000 per hour? CRE owners routinely pay such invoices – albeit unknowingly. The invoice shows up stating: “15% of the Tax Savings = $60,000”, without the transparency that it equates to $5,000 per hour.

If owners understood the elements and hours that go into the $60,000 tax appeal fee invoice, they would be aghast. Post-Covid may be a prime opportunity to reconsider how to bring down these excessive real estate tax appeal fees.

Appeal Fee Transparency

A 20% value reduction on a $100 MM value with a 2% tax rate would result in a $60,000 appeal fee using a fee equal to 15% of the tax savings. Here’s how the $60,000 fee equates to $5,000 per hour. An average appeal could take twelve hours. The hours could typically be apportioned as four hours for the amortized administrative work (e.g., agent authorization paperwork, appeal form filings, data collection of owner’s financials, etc.) across a portfolio and six hours for the valuation work (e.g., evidence development, appeal case documentation, etc.) specific to one appeal. The assessor and board hearings are allocated one hour each. The sum of hours is 12. $60,000 divided by 12 hours is $5,000 per hour.

Most CRE owners would be shocked to learn the typical assessor and board hearing is one hour. Many are 30 minutes. Consultants and attorneys do a stellar job convincing CRE owners that their relationship with the assessor is a critical factor in obtaining value reductions. Some consultants and attorneys use this mythical relationship to rationalize the excessive fees they are paid. In today’s world of well-educated government assessors, who are the subject of professional oversight, value reductions are attained via the compelling nature of the data presentation and have nothing to do with any personal relationship.

Applying Technology to Re-invent the Appeal Fee Paradigm

A superior approach, especially during this post-Covid period of considerable re-invention, is to apply technology to reduce both the administrative and valuation workload and time. Technology can be applied to automate the administrative processes by, for example, having software auto produce all of the compliance paperwork. Likewise, technology can be used to automate the valuation work such as by utilizing software to auto ingest a property’s financials into a valuation model and having the valuation model auto produce (without human intervention) a draft appeal package. By utilizing technology, the aforementioned hourly breakdown could be reduced from twelve to six hours – without sacrificing the quality of evidence development or achievement of obtaining a lower value.

In the above appeal example, the contingency fee percentage could be reduced from 15% to 2.5%. The fee would be reduced from $60,000 to $10,000, which would still produce a healthy $1,600 per hour. Both sides win while the consultants and attorneys are no longer being grossly overpaid. Imagine a portfolio of one hundred properties experiencing fee savings of $50,000 per property (i.e., an 83% reduction) each year for five years. That equates to a capitalized increase in portfolio value of $400 MM.

CRE owners should investigate applying technology to automate the production of the tax appeal administrative and valuation functions and gain visibility into the time it takes to produce the appeal results. By doing so, CRE owners could bring appeal fees down to acceptable levels – eliminating the excess. Increasing efficiencies and reducing operating costs is what great owners and asset managers do.

Bill Quinn is CEO of CREyield and formerly Director of Tax & Legal Services at PwC. He has saved CRE owners hundreds of millions of dollars appealing tax values. He can be reached at bill.quinn@creyield.com