Economists are pronouncing in the press what real estate professionals have known for months. Recession is here. One fallout from the continuing slide in real estate markets is that property owners will be taking a critical look at their property tax valuations when their tax statements and valuation notices arrive this spring. As markets soften, owners must decide whether their property’s assessments are truly in line with current market values. Ultimately, the question for owners is whether their property could sell for the amount indicated on the statement under the heading “Estimated Market Value.” The deadline for bringing an appeal challenging the 2007 assessment (payable 2008 taxes) is April 30, 2008.

For many owners, years of rising property values removed any need to learn and understand Minnesota’s tax appeal process. With today’s markets in decline, owners and property managers need to understand some of the more important aspects of this process.

Appealing one’s property tax assessment can be challenging. The process has precise requirements, and a stumble carries the potential for dismissal of the appeal. The appeal petition itself must be properly composed, served upon the necessary parties, and filed with the court. Taxpayers also cannot fail to timely make their tax payments during the pendency of their appeal. However, perhaps the most perilous step in the process is the requirement that taxpayers appealing their assessments must submit to the local assessor, within 60 days of the petition filing deadline, data regarding their income-producing property’s operating activity (the “60-Day Rule”). While the language of the pertinent statute describes the required data in seemingly simple and straightforward terms, court interpretations of what level of documentation is sufficient for compliance is hardly clear. One Supreme Court justice described the current interpretation of the 60-Day Rule’s data requirement as creating an environment where the “best advice to property owners who wish to contest their property tax assessment is to crank up the copy machine and provide absolutely everything they have within 60 days.” The issue of what information suffices to meet the statutory requirement is currently one of the more hotly contested issues in real estate tax law.

The 60-Day Rule

The language of the disclosure statute identifies the required data as “[i]nformation, including income and expense figures, verified net rentable areas, and anticipated income and expenses….” The required information must be provided to the county assessor within 60 days after the applicable petition-filing deadline of April 30. The statute mandates dismissal of the petition for failure to provide the necessary information. Dismissal is accomplished by a motion brought by the county’s attorney and decided by the Tax Court.

This data disclosure requirement applies only to properties that are “income-producing.” The typical income-producing property is a multi-tenanted office, retail, or industrial center. However, also included in the category are property types such as apartment buildings, senior care facilities, and leased real property of any kind, even agricultural property. Any property that generates rental income for its owner is considered to be income-producing.

Generally, an owner-occupied property is not income-producing. However, occupancy relationships between related companies have been determined to be income-producing for purposes of the 60-Day Rule. In addition, the disclosure obligation has been held to be applicable in instances where the petitioner is seeking a change in the property’s classification, rather than its valuation. Thus, a non-profit operator of an assisted living facility seeking exemption of their property as a purely public charity must submit information under the 60-Day Rule regardless of their making no claim as to the property’s value.

The relevant date for determining the property’s status for purposes of the 60-Day Rule is the assessment date (January 2 of the assessment year).

The purpose for the 60-Day Rule is to make pertinent operational data available for assessing authorities to evaluate the property under the income capitalization approach to appraise the property. Without income information, assessing jurisdictions must rely heavily upon the comparables approach for valuing property, which is based upon sale prices of properties deemed “comparable” to the subject property. In enacting the data disclosure rule, the legislature determined that owner-provided data would be useful in the determination of value and, therefore, would simplify and speed up the valuation appeal process. The legislation does not eliminate the formal procedure of discovery, but is designed to streamline that process by requiring data to be disclosed.

The current 60-Day Rule requirement evolved from a statutory provision enacted in the early 1990’s as an evidentiary rule that excluded from admission at trial certain income and expense information not provided to the assessor sufficiently before trial. In 1994, the legislature changed the rule to provide for the outright dismissal of the petition if data is not provided to the assessor within 60 days after filing.

The many court decisions interpreting the 60-Day Rule focus on what is the meaning of “including…” in the statute. The language clearly implies that more than simply income, expense, and building area information is required. How much more is the question. The statute’s open-ended nature defies a definitive list.

Providing Information Under the 60-Day Rule

Consider a property owner who wishes to challenge the 2007 assessment on its income-producing property. The owner would appeal that valuation by serving and filing an appeal petition by April 30, 2008. Under the 60-Day Rule, information must be submitted to the county assessor by June 29, 2008. Although June 29 falls on a Sunday, and by law the deadline becomes the next business day, the owner would be well advised to submit the information no later than Friday of the previous week, June 27, 2008.

Among the materials to be assembled, the owner certainly must include the property’s operating statement information for calendar year 2007, the budgeted operating statement information for 2008, and a verified statement of the property’s square footage area. The courts have interpreted the rule to also require the submission of other detailed rental information. So, the property owner should prepare a 2007 and current rent roll for the property, listing tenants, occupied/vacant spaces, rent/operating cost lease payments, and lease lengths and terms. In addition, the submission should include copies of executed leases and supplements (lease abstracts may not be sufficient). If subleases are in place, those materials also should be included. Where applicable, the property owner should include information on percentage rents (whether paid or not). In situations where the lease arrangement requires that certain property expenses be paid by the owner, and others paid by the tenant, those arrangements and amounts should be provided. If the owner/tenant relationship is one between related entities, the petitioner should treat the property as income-producing (not owner-occupied) and disclose the occupancy agreement and the financial transfers made pursuant to the arrangement.

The petitioner should not consider information supplied to the assessor in earlier years or under other circumstances as satisfactory for current compliance. If necessary, the owner should re-submit the data within the 60 day time period. If accurate audited data is not yet available by the submission deadline, the petitioner should still provide the current information and supplement those materials with finalized information when it becomes available.

The foregoing suggestions have been gleaned from court decisions over the years, and are not intended as an exhaustive account of what is required for compliance. Interpretation of the rule continues to evolve. Not all assessor offices require the same level of thoroughness. Material submitted to the county assessor is deemed “private/non-public” data under the Minnesota Government Data Practices Act, which protects the data from disclosure to unrelated parties without a court evaluation of the request and a balancing of the burden on the subject of the private data against the rights of the person requesting that data.

Conclusion

Given the weakness in the markets, diligent property owners must evaluate their tax valuations. Assessing jurisdictions rely on mass appraisal models and cannot thoroughly appraise an individual property to determine an accurate valuation. A decision to appeal the assessment must factor in the disclosures that are required to be made in connection with the appeal. Understandably, many property owners are loathe to submit proprietary information concerning their properties and businesses to the assessor. The owner must judge the risk of providing data to the assessor with the opportunity of correcting an inflated property valuation that will be the basis for future increases if not abated.

Some practitioners (and even courts) have suggested that the 60-Day Rule raises the potential for abuse by county attorneys who may use the rule to quash appeals, not on their merits, but on clever claims of non-compliance. The Legislature may take up the issue this year. A measure to modify the law in several respects failed in 2007. Under the law as it stands today, a good faith effort by a petitioner to provide pertinent information, conducted in the spirit of the statute’s purpose, is the petitioner’s best defense to avoid a dismissal motion, or fend off one that is brought.