Property taxes represent a big chunk of a franchise owner’s expenses. Why then is the tax bill just paid by property owners, without question?
Many property owners don’t realize that a “well-known name” associated with a building or a product, generally increases the value of a business. However, that “well-known name” is a non-taxable element. Property owners often mistakenly pay more taxes than they should on a building that has a name, such as Burger King or Trump, when they should really deduct the value of that well known name.
In most U. S. jurisdictions, intangible assets, including then “name value” are not taxed as part of a real property assessment, at least not part of the real estate assessment. An intangible asset is:
1. A nonmonetary asset that manifests itself by its economic properties. It does not have the physical substance but grants rights and economic benefits to its owner
2. A nonphysical asset such as a franchise, trademark, patent, copyright, goodwill grants rights and privileges and has value for the owner.
Hence, the objective is to separately value tangible real estate property, and not include the business (intangible) value. Otherwise, there may be some danger in overvaluing your real property assessment due to an inability to distinguish the value of the intangible which has goodwill and name recognition.
The assessor should estimate only the value of the land, plus improvement, free of any intangible value. Should there also be a business “flag value” (i.e. franchise name), it should not increase a property’s taxable value; even though, it may generate more income to the owner. Property tax should be based only on the value of the real estate, unrelated to a having well-known name or owner.
When real estate and business are intertwined, taxpayers should challenge their assessments. With a properly prepared tax appeal petition, you can then expect property tax refunds. The higher one can demonstrate the value of their intangible to be, the lower one will be their taxable residual real estate value for the land and improvements.
Having a well-known name plastered on a building, or having it associated with a product, is usually of value to the property owner. It may also result in a buyer paying a higher premium to purchase the property. But the good news is, that name brand recognition portion should be extricated in arriving at its property’s assessed taxable value. The property tax should be based on only the value of the real estate and not be influenced because of the right to use a name, the same as if that additional component was totally non-existent.
There is no requirement for a tax assessor to ascribe separate values to intangible assets, although they always have the option to do so. By reporting the combination of real estate and intangibles as only one real estate value, the appraiser will then be providing a misleading value conclusion, causing you to pay higher taxes. Be aware that this is not good for you. As this is not act exact science, one should take advantage of the fact that there is a general lack of consensus by many property appraisers. This means you should understand this concept and contest your assessment.
Business valuation,which includes goodwill, has to do with the value of rights inherent in ownership of the business. This is in contrast to a real estate appraisal, involving the valuation of land and improvements. Goodwill is oftentimes included in the purchase price of a business. However, it is not a non-taxable component.
There is nothing wrong in there being two distinct values. One will be the higher Market Value and the other will be a lower Taxable Value. Understand that a property tax (or millage tax) is a levy only on the value of land + improvements. Be sure to remove the value of all intangibles.
A four-part test should be used by the tax assessor to determine the existence of an intangible asset:
- Should be identifiable
- Should have evidence of legal ownership (i.e. franchise agreement)
- Should be capable of being separate and divisible from the real estate
- Should be legally transferable
If any portion of your asset possesses all four characteristics, this is great news for you. That portion should be extricated from your estimated total taxable market value, reducing your taxes.
One should separate the market value of the land and building from the total value of the business to reduce the tax liability. They have value as a going business, but are not to be taxed as real property.
Property appraiser’s taxes are based on estimates derived from mass appraisal techniques. Although they might be accurate overall, it does not necessarily reflect your specific property’s characteristics. Don’t just blindly pay your tax bill.
Barry Sharpe is a principal at Property Tax Appeal Group, that petition real estate property values. He is also a Realtor, Building Contractor and Owner of a large portfolio of commercial properties.