Senior Living Providers Must Be Vigilant To Keep Property Taxes in Check

While senior housing providers across the country grapple with controlling rising costs from operations and labor, there is one other line item to which they should be paying close attention: property taxes. 

Property taxes are a hot button issue across the country, particularly as reforms are being proposed to how commercial real estate is assessed and taxed in areas such as California and Cook County, Illinois.

A provider is usually the party responsible for paying the property taxes on a community, regardless of ownership status. And, property taxes are usually the largest real estate expense for a senior living property, aside from financing.

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Therefore, providers should be regularly monitoring property tax obligations, as well as keeping tabs on property tax assessments and appealing those assessments to keep the property tax burden on a community as low as possible.

They need to remain vigilant because property tax laws and regulations can shift, and assessors do not always appreciate the nuances of senior living, Seigel Jennings Partner Kieran Jennings told Senior Housing News. Based in Beachwood, Ohio, Siegel Jennings specializes in state and local property tax law.

Legal precedent

In most states, the fee simple value of the real estate — an unencumbered transfer of real estate without any accompanying leases or businesses associated with the property — is used to uniformly measure valuations across all property types, Jennings told SHN.

When a senior housing community changes hands in a sale, county assessors use the purchase price to determine what their offices believe is the fair market value of the real estate. But purchase prices usually include the real estate and the underlying operations, and when  assessing commercial properties, it is standard to separate the real estate and business activities.

There is legal precedent for this. In 1997, the Ohio Supreme Court ruled in the case of Dublin Senior Community LP v. Franklin County Board of Revision that the business and real estate activities must be kept separate. Furthermore, the separation of income and expenses is also important when considering sale prices and fair market values of comparable assisted living facilities. 

Another reason to separate the values between real estate and business activities is that the latter may not reflect current values. The leases in place may not all be at market rents, Jennings told SHN.

The Dublin Senior Community case opened up senior housing providers the ability to compare their real estate to multifamily communities for assessment purposes. This allows providers to compare base unit rents between a senior housing facility and an apartment building for assessment purposes. They can apply rents as a basis of gross square footage in the facility, and apply expenses the same way.

“Now you don’t have to worry about the fact that the actual suites themselves are much smaller in the assisted living. You’re taking into consideration the value of the common areas,” Jennings said.

Appealing assessments

In addition to separating the business from the real estate, providers should be keeping tabs of their property tax assessments, as the assessment serves as the valuation of the property and is the foundation for how much is paid in property taxes.

Jennings recommends that those responsible for paying the property taxes on a senior housing facility review their assessments on an annual basis and appeal their assessments as properties are newly reassessed, and every year during an assessment cycle, if possible. Keeping the assessments as low as possible reduces the property tax burden and establishes a value baseline for the next reassessment cycle.

There are exceptions, however. Property owners in Ohio, where real estate is assessed triennially, are prohibited from appealing every year, Jennings told SHN. He recommends providers in North Carolina appeal only new reassessments.

“Your data valuation is always the year of the beginning of that period. So if 2009 was the beginning of a four year cycle, and you’re in 2012, your date of valuation is still Jan. 1, 2009,” he said.

Another reason for providers to keep annual tabs on assessments is to see if other entities are filing appeals to raise the assessment. In Ohio and Pennsylvania, for example, municipal boards of education are very involved with property tax appeals. The tax levies these departments apply to assessments fund operations, and a higher assessment equals more money for these agencies.

“You can have a property that you feel totally comfortable with its valuation, and the Board of Education can file an affirmative tax appeal to increase your taxes,” Jennings said.

Ohio and Pennsylvania also have statutory and case law permitting school districts to file affirmatively to increase assessments, which is another reason why operators should be looking at assessments regularly.

“You want to at least make sure that things haven’t changed,” Jennings said.

Keeping property tax assessments may soon take on a greater importance in two parts of the country. Voters in Cook County, Illinois elected Fritz Kaegi as Assessor last year. Kaegi, who ran on a reform agenda, pledged to make his office’s valuation methods more transparent including making all data sets for properties such as property sales and income generated from commercial properties available online. He also promised a more equitable distribution of the property tax load between residential and commercial properties

The Cook County Assessor’s office is the largest in the U.S., responsible for assessing 1.8 million parcels. The county, which includes Chicago, is reassessed on a rotating triennial schedule. The north suburbs have seen assessments for commercial and industrial properties rise 89.9%, according to Crain’s Chicago Business.

In California, a measure on the 2020 general election ballot aims to reform Proposition 13, a 1978 law which caps property taxes at 1% of assessed value at the time of sale, and limited upward reassessments of 2% as long as the same owner holds on to the property.

The 2020 ballot measure aims to create a “split roll” excluding commercial properties from Proposition 13 protections, and tax those properties exactly as in other parts of the country.

This would have an adverse effect on assisted living communities should voters approve the measure, Sally Michael, president and CEO of the California Assisted Living Association, said in a statement to SHN.

“The CALA Board of Directors has taken a position to oppose the split roll measure. As such, we will be educating our members on this issue and joining other groups in vocal opposition to this proposed tax increase because it will increase the cost of assisted living and reduce accessibility of quality senior housing across the state,” the statement read.

Providers also should be vigilant if they are involved in transactions with real estate investment trusts.

With commercial properties including senior housing, sale-leaseback transactions are a popular mechanism for a buyer to finance an acquisition. By their nature, however, these are financing tools and not arm’s-length market transactions.

When a senior living operator initially engages in a sale-leaseback with a REIT, an assessor typically understands that the sale price includes the value of the operations. But if that property again changes hands, and a REIT sells to another REIT, assessors more frequently view that as a fair market value transaction — which means the property tax assessments can increase dramatically, even by as much as 200% to 300%, putting the operator in danger of default due to no longer meeting lease coverage ratios, according to Jennings.

As this example demonstrates, senior living providers need to be knowledgeable about their own local tax laws and be ready to advocate for themselves when it comes to getting a fair assessment.

“Senior housing is a very complex industry, yet the transactions are looked at very simplistically by the assessors because they have little other knowledge,” Jennings cautioned.

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