Study claims commercial, industrial properties are severely under-assessed

It is now the belief of city officials and Indiana’s largest property tax consulting firm, however, that the tax strain in Howard County has been placed unfairly on the shoulders of homeowners and locally-owned businesses, effectively giving larger, out-of-state owned businesses lower tax rates.

Concerns related to tax distribution were initiated in City Hall when it was revealed earlier this year that Howard County ranks last of Indiana’s 92 counties in gross assessed value change since 2006, losing 14.3 percent, or $950 million – a development not consistent with the area’s recent economic investments.

That figure also sits largely at odds with a number of comparable Indiana counties, including Madison County, which experienced a growth of $536 million during that time period, and Monroe County, the gross assessed value of which grew $1.6 billion.

With assessment values determining property tax amounts – a portion of funding used by many governmental entities - the drastic decline has become a disturbing trend for local officials.

The revelation led officials to commission a study conducted by Indianapolis-based firm Nexus Group titled “Commercial and Industrial Assessments in Kokomo,” an inquiry that, from Nexus’ viewpoint, revealed significant commercial underassessments, most notably within franchise restaurants.

The study, which was delivered in July, ultimately found that Kokomo’s commercial and industrial properties were under-assessed in 2015 by an estimated $190.6 million. This means, according to Nexus’ estimation, Howard County assessors are leaving more than $5.4 million of commercial and industrial tax revenue on the table.

“If you look at the current situation, tax caps and under-evaluation of commercial and industrial taxpayers, the winners and losers are very easy to identify,” said Nexus Group Chief Operating Officer Jeff Wuensch. “The biggest losers are the taxing units, especially the Kokomo School District and City of Kokomo, as they are collecting $5-plus million less than what they should be collecting.”

Wuensch went on to describe the additional entities affected by the lost revenue, including libraries, townships and the county itself. Most importantly, however, is the effect under-assessed commercial and industrial properties have on Kokomo’s residential taxpayers, he said.

“The list of losers would also include those taxpayers that are paying a higher share of the property tax burden, namely homeowners and small businesses. Our study documented that most small, locally-owned businesses in Kokomo were largely accurately or over-assessed,” said Wuensch. “Under-assessing the larger, out-of-state-owned businesses increases the property tax on small businesses.

“While the losers in this scenario are long and wide, under-assessed businesses are the only winners. And this comes at the expense of most other taxpayers.”

A Flawed Process?

In a written statement, Howard County Assessor Mindy Heady and Center Township Assessor Sheila Pullen defended the assessments and their current methodology, which consists largely of sales study ratios.

In effect, sales ratio studies are meant to compare sale prices to market values to measure the overall accuracy of assessments.  

“The [Department of Local Government and Finance] confirmed to us that our assessments are conducted in strict accordance with state statutes. They also confirmed to us that by using eight years’ worth of sales ratio studies that we actually have a very strong basis for the assessed values in our community,” they wrote. “We believe that if our numbers were as grossly off as suggested by [Kokomo Mayor Greg Goodnight] and Nexus, we would not be receiving annual approvals from the state.”

In response to Heady and Pullen’s explanation, Wuensch largely criticized the county’s approach to commercial assessments, saying that while their data collection is accurate – a vital component of any DLGF approval - their formula-driven approach has led to poor and incomplete evaluations.

“This is the most common and simplest type of ratio study,” he said. “There is little to no field work done with this type of study as the majority of work is done at the computer.”

To provide a specific example of the county’s perceived shortcomings, Wuensch pointed to the Starbucks at 1401 S. Reed Road, which the county assessed at $157,700. In the study, Nexus gave the commercial property a $1 million assessment.

Wuensch believes that disparity comes mostly from miscalculations in the franchise’s effective age. While the building was constructed in 1976, the full Starbucks-related renovation was completed in 2006, a year that should be represented as the effective age.

“It is common sense in a lot of ways,” he said. “For instance, if a building was built in 1941 but it looks brand new, I can’t put it down as 1941.”

Instead, the Starbucks assessment calculations are still being done with an effective year of 1976, which has resulted in a maximum depreciation rate of 80 percent. The county’s mishandling of “that second step of asking yourself the value of the property,” is costing taxpayers money across Howard County, Wuensch said.

“The computer spits out a cost-based value, but you still have to ask yourself if the value is too low, too high or if it makes sense. That portion is only a cost-based estimate,” he said, describing effective age as the most serious problem. “The computer spits out the value on Starbucks and I have to ask if it makes sense. Nothing makes sense about that value…You will end up with low assessments if you don’t change effective age. The whole point of effective age is to change value.”

In further defense of their mass appraisal system, Heady and Pullen described the possibility of deviations, and later discussed the effect they believe Howard County’s economic downturn had on commercial values.

“It is important to note that mass appraisal is not a perfect science. It is not uncommon to find an outlier in either direction, high or low…It is our belief that as the commercial and industrial real estate market improves this perceived problem will work itself out,” they wrote. “We expect our values to be consistent with actual market sales. When times are good, values will start to increase; when they are bad they will decrease.”

The School Effect

Since the current circuit breaker property tax cap went into effect in 2010, schools have been feeling the impact of lost revenue. In fact, the cap cut anywhere from $47,000 to $7.95 million from area school corporations’ budgets during the five years preceding 2015 budget discussions.

The circuit breaker limits the amount of property tax people can be compelled to pay to 1 percent of the assessed value for homestead properties; 2 percent for residential properties, agricultural land and long-term care facilities; and 3 percent for nonresidential properties and personal property.

Schools rely on property taxes for their transportation, bus replacement, capital projects, debt service and pension debt funds, all of which have been limited since the caps and could be further affected by the underassessments.

“Our school systems have been hit hard and when you under-assess franchises, this shoves that tax burden to our property owners and farmers,” said Goodnight. “We want to be supportive of the schools’ challenge to this assessment issue.”

While acknowledging his lack of expertise in the area of property assessment, Taylor Community Schools Superintendent Chris Smith echoed Goodnight’s sentiments, saying “things are tight, and it’s not just Taylor. It’s everybody.

“With the property tax caps, anything we could do to increase the funds would be much appreciated,” said Smith. “Money is needed for all your schools, and right now we have apparently the lowest [assessed value] in the state."

Smith said that during a meeting about the Nexus study, he was “absolutely amazed by the information that was shared” but he had no way of knowing if the study is accurate. If it is, however, any sort of funding increase would help, he added.

“If that is accurate information we got from Nexus, and they are going to try to fix the assessed value, it could be years before there would be a financial impact to Taylor schools,” said Smith. “But it would a benefit because we are running very tight. We just cut a million dollars out of the general fund.”

Kokomo School Corp. Superintendent Jeff Hauswald and Kokomo school board member Chrystal Sanburn did not return calls for this story.

Nexus vs. Howard County

As Level III assessors – the highest attainable Indiana certification – Heady and Pullen, despite their refusal to meet with Nexus representatives, have fought against the study, questioning Nexus’ methods and qualifications.

During the review of the Nexus report, in fact, Heady and Pullen emphasized four items they say discredit the study and highlight its lack of reliability.

In their written statement, they claim Nexus did not use sales study ratios, but did perform “sales chasing,” defined by the International Association of Assessing Officers as “the practice of using the sale of a property to trigger a reappraisal of that property at or near the selling price…the practice causes invalid appraisal level results.”

Wuensch adamantly denied the sales chasing accusation, saying, “Since Nexus Group is not responsible for the assessments in Howard County, how in the world can we be accused of changing assessments? This makes sales chasing impossible.”

Wuensch added Nexus officials visited all 160 sample properties within the study to conduct their own assessments, later comparing their findings with the county’s figures.

“This type of ratio study is much more thorough than a sales ratio study as each individual assessment error is documented,” he said. “Such errors have been documented and included in our study.”

In addition to the first two items, the county officers also charged Nexus with having led other counties into “major lawsuits, as a result costing taxpayers hundreds of thousands of dollars.

“If the county were to agree and move to adopt the mayor’s Nexus report, it would cost the taxpayers of Howard County $1.5 million just to conduct a reassessment,” they wrote. “This would have a ripple effect on all taxing units and would delay receipt of property taxes for schools and townships.

“In other communities where they have conducted such reassessments based on Nexus studies, units of government had to borrow money from the bank to meet obligations until the whole process could be worked through. Even after such disruption, the appeals and legal messes mounted.”

While Wuensch admitted that Nexus has previously filed collection cases for work completed in three counties – LaPorte, Tipton and Noble – each case ended with the county settling with Nexus for the cost of services, he said.

Wuensch added Nexus is not currently involved in any lawsuit.

“Since 2006, each of our counties has experienced an increase in real property assessed values. No Nexus county has experienced a decrease, even when you consider appeals,” he said. “Howard County, on the other hand, has lost nearly $1 billion during this same period.”

But most importantly, say Heady and Pullen, is what would be a $5 million tax increase on commercial and industrial properties, an inflation that would affect both large employers and locally-owned small businesses.

In response to this last claim, Wuensch stated that increased assessments on the commercial properties highlighted in the study would actually result in tax breaks for small business owners.

“Larger commercial taxpayers that are headquartered out of state are the properties that are receiving substantial assessment breaks,” he said. “With lower assessments, tax rates are higher for all taxpayers. The vast majority of the small businesses that are locally owned are accurately or slightly over-assessed.

“This combined with a higher tax rate results in a big shift to the locally owned small businesses, homeowners and farmers. Accurate assessments will actually reduce the property tax rate, thus reducing the property tax liability for small business owners.”