Property tax is a significant factor for commercial real estate development, yet it is often only thought about when the tax bill arrives. At that point, you take a look at the amount due and the due dates, then insert them into your company’s financial function or A/P process for payment.
What is wrong with this picture?
First, the obvious – in most cases, it is too late to do anything about your taxes once the bill arrives. Action must be taken when the assessment notice is received earlier in the year.
Just as critical, treating property tax as a fixed cost misses the opportunity to evaluate and potentially manage the factors that contribute to—and potentially reduce—this significant cost. This is true even if the assessment has not changed appreciably since the last reappraisal. Most jurisdictions “mass appraise” because of the volume of parcels, but this has the chance of over valuing your property.
Careful attention to the dates and details provided in the property tax assessment notices is crucial in determining whether it warrants an appeal. At the core of your review should be an understanding of the factors that can affect value and the unique environment in which you operate.
There are three valuation techniques used in appraising commercial real estate: cost approach, income approach and sales approach. Should you decide to appeal the assessment, it will be important to know which appraisal methodology was used on your property.
Cost - The cost approach estimates the value of the land as if it were vacant and then adds the cost of construction less depreciation to arrive at a total estimate of value for land and building. While cost is not always a good indicator of market value, taxing jurisdictions use the Real Property Assessment Manual for computing cost, which provides a uniform approach. Depreciation is more subjective.
Income - The income approach determines value by analyzing (estimating) annual rent and typical expenses and applying a market capitalization rate. In many locales, taxpayers must supply income and expense data. Although it may be easier to capture rental income, the commercial property owner should take great care in identifying every expense related to operating the property.
Sales - The sales approach uses a database of market transactions for comparable properties. This is a common approach in larger jurisdictions.
Factors Can Impact Value
Many factors can affect the value of a property. Some are specific to the condition of the property itself and surrounding neighborhood—age, deferred maintenance, environmental issues, ingress/egress issues, vacancies and declining rents to name a few. Others can reflect the economy. Commercial real estate entities should consider their unique economic conditions before undertaking a review of their property tax assessment.
Online commerce has been particularly rough for the traditional retail model of malls and strip centers. Business failures and foreclosures are contributing to a glut of property and an abundance of vacant buildings, which will cause a decrease in property valuations. Retail chains as well as strip center owners may want to take advantage of the price drop for their locations, particularly for sites located in retail areas that have been particularly hard hit by industry trends.
When businesses are expanding, they’re looking for modern buildings, which is creating a lot of vacancies in older office parks and complexes. Assessed property values for these older buildings are likely not taking into consideration the vacancies, which may be understated in the property tax assessor’s estimates. If you have older office space locations, you should reconsider appealing your property tax assessment, especially if your building has vacancies within it.
Owners of multifamily properties have been hit with property tax increases over the past few years and, unfortunately, that trend appears to be here to stay. The market for purchasing multifamily units is booming, which means vacancies are at an all-time low. There may not be much wiggle room in renegotiating your local assessment, but you should consider having it evaluated anyway. There may be small considerations that were not accounted for in the property tax assessment that could have a significant impact on what you owe.
How and When to Appeal (Reduce) Assessments and Tax Burden
Entities can be proactive about their property tax evaluation and analyze what they owe before the receipt of an assessment. Being proactive can ensure you have the time you need to perform the analysis. If your review is triggered by receipt of the assessment, you may have to ramp up and develop your case within a short time span.
There are specific filing deadlines that vary from jurisdiction to jurisdiction. In some jurisdictions, deadlines are as soon as 15 days from the receipt of your assessment. You will need to act swiftly.
A proactive approach to managing your property tax burden can return significant dollars to your bottom line. The best time to analyze your property taxes is before you receive your assessment so you have adequate time for analysis. Once you have your assessment from the taxing jurisdiction, the clock starts ticking. You have a legal right to appeal your assessment, but the deadline for filing an appeal may be tight. Filing deadlines vary by jurisdiction and may be as soon as 15 days from the receipt of your assessment. Additionally, for an appeal to be successful, you must be well prepared to make your case efficiently and succinctly, as your hearing will likely be about 30 minutes at most.
Every state has its own property tax laws and individual jurisdictions are tasked with implementing processes to comply with those laws. Managing property assessments in multiple states or multiple jurisdictions within a state can be particularly challenging, with differing deadlines and requirements for an appeal. If you do not have the in-house capacity, there are many options for outsourced expertise. In these instances, seeking the assistance of a property tax advisor may be the most financially responsible and strategically productive course of action.
Rich Hermes is a tax professional in the CBIZ MHM St. Louis office. For information on property tax assessment, appeals and related issues, feel free to contact Rich at email@example.com (314-692-5841) or your local CBIZ MHM professional.