competing resort down the street (which is
currently assessed at $48 million).
An apartment complex in Tempe was built
in 1999 as an assemblage of six parcels.
Through the 2013 tax year, the county
assessed the property under six separate
parcel numbers, although the property was
owned and operated as a single economic
In 2014, the out-of-state owner asked
the assessor to consolidate the six parcels
into one so the owner could pay a single tax
bill. The assessor dutifully complied, and
because there was a parcel consolidation,
applied Rule B to the 2014 LPV. As a
result, the 2014 LPV of the apartment
complex increased from $26,382,750 to
$32,740,224, thereby costing the owner
$28,303 in additional taxes for 2014.
Beginning in 2015, the increased cost to
the owner for this “self-requested” Rule B
adjustment will be in the range of $70,000
per year, because the entire tax rate will
apply to the LPV, not just the primary tax
as was the case in 2014.
An investor applied to a local bank for a
loan to acquire and renovate an 18-unit
apartment complex in Phoenix. An appraisal
commissioned by the bank supported the
acquisition price and estimated a stabilized
value upon completion of renovations at
$1,380,000. Because this was an income-producing property, the appraisal relied primarily on the income approach. However,
the appraisal did not consider the effect of
Rule B on the value of the property.
Fortunately, the bank’s review appraiser
was familiar with Rule B and recalculated
the property tax estimate for the property
set forth in the appraisal report. As the
result of Rule B, the annual property tax
estimate increased from $5,600 to
$20,809, resulting in a substantial reduction in net income, and a corresponding
reduction in appraised value under the
income approach from $1,380,000 to
The bank’s loan commitment required a
debt-coverage ratio of not less than 1: 20
during the term of the loan. Without the
Rule B adjustment, the debt-coverage ratio
was 1: 23, well within the bank’s loan
requirements. But after the Rule B adjust-
ment, the debt-coverage ratio would drop
to 1:03, thereby rendering the loan non-
conforming. The bank declined the loan. If
the bank had made the loan, the subse-
quent application of Rule B to the property
tax assessment would have rendered the
loan in default due to a violation of the
Strategies to mitigate the consequences of a
Rule B adjustment are limited by two factors.
First, the Rule B ratio changes every year.
As shown on the chart on page 41, the
Rule B ratio for commercial property in
Maricopa County changed from 78 percent
to 98 percent in a span of three years (i.e.,
2009-2011). It is very difficult to predict
what the Rule B ratio might be from year to
Second, the Arizona Court of Appeals
has held that a Rule B adjustment is lawfully
made in the year when the assessor makes
changes to the tax roll, but not necessarily in
the same year that the change to the property occurred. 16 Thus, an owner cannot be
assured that the Rule B adjustment will
occur in a year with a favorable Rule B ratio.
Rather, the assessor could defer the Rule B
adjustment to a later year, with a higher
Rule B ratio.
In addition, there are uncertainties in
the Rule B assessment guidelines. The
Assessment Procedures Manual published
by the Arizona Department of Revenue
states, “Rule B must be used when any new
construction equals ten percent or more of
the prior valuation year’s FCV.” 17 But the
1. Proposition 117 amends Article IX, Section 18 of the Arizona
Constitution. The Proposition was codified by the Arizona
Legislature under Laws 2013, Chapter 66, Section 9, amending
A.R.S. § 42-13301.
2. Apologies to William Shakespeare.
3. Compiled Law of the Territory of Arizona, Chapter XXXIII,
§ 2 (1871).
4. A.R.S. § 42-17153(A). Peabody Coal Co. v. Navajo County, 572
P.2d 797 (Ariz. 1977).
5. A.R.S. § 42-17153(C)( 3).
6. BLACK’S LAW DICTIONARY, 1596 (rev. 9th ed. 2009) (emphasis
7. Property taxes are levied by the governing body of each county,
city, town, community college district, school district, and often
by special taxing districts (such as irrigation districts). The
required property tax levy is then divided by the final assessed
value of all real property in the taxing jurisdiction to compute the
tax rate. The County Board of Supervisors extends that tax rate to
the tax roll prepared by the County Assessor. The board assesses
taxes on all property in proportion to its value. Tax amounts for
real and personal property are tabulated by the board to complete
the assessment. A.R.S. §§ 42-17151 and 42-17152.
8. There are currently nine classifications of property for tax purposes.
A.R.S. §§ 12-12001 through 12-12009. The assessment ratio for
each class of property is set forth in A.R.S. §§ 42-15001 through
9. Locally assessed property is property valued by the county assessor,
as opposed to centrally assessed property valued by the Arizona
Department of Revenue (such as mines, oil and gas interests,
utilities, airlines, timber, pipelines and railroads.)
10. A.R.S. § 42-13051.
11. Id. § 42-11001( 6).
12. Id. § 42-11001( 6) and ( 7); A.R.S. § 42-17151.
13. Id. § 42-13301.
14. Id. § 42-13301(B).
15. See the discussion in the section titled “Planning Strategies” regarding the assessor’s discretion to apply Rule B to new improvements.
16. Premier RV & Mini Storage LLC v. Maricopa County, 215 P.3d
1121 (Ariz. Ct. App. 2009).
17. Arizona Department of Revenue Assessment Procedures Manual
at 3. 3. 8 (Mar. 1, 2011).
18. For example, what type of improvements costing less than 10 percent of FCV should trigger a Rule B adjustment? Should tenant
improvements or routine maintenance trigger such an adjustment?