7 commercial property tax tips after the pandemic
Record commercial real estate trading activity in 2021 is having a marked impact on property values in 2022. Transactions in 2021 were up 88% from 2020 and were 35% above 2019 levels, according to Ernst & Young. The large number of sales in 2021 extended to all categories of real estate, and many types of commercial properties saw significant price increases.
Market values are the basis of property tax assessments in most tax jurisdictions. As post-pandemic market values fluctuate due to rising prices, homeowners must adopt strategies to keep the value of their assessed properties low. As we emerge from COVID-19, here are seven key considerations for minimizing property tax assessments even as prices rise.
- Report property operations. The market value of a commercial property is based on its financial performance. A weak property will have poor performance indicators, such as excessive vacancy or below-market rental rates. Poor performance is usually the basis for a lower assessment and a lower property tax bill. Where possible, landowners should report these types of performance indicators to tax authorities annually before assessed values are set and tax bills are issued.
- The prices attributed in the real estate portfolios are not market values. A buyer purchasing a real estate portfolio will generally spread the total price paid over all real estate acquired as well as other non-real estate assets. Investors create these portfolio purchase allocations for tax, accounting, financing or other purposes, and may order an “allotment” valuation for underwriting purposes. However, allocations of price or total portfolio value to individual properties in a portfolio are rarely a good indication of a property’s market value. Likewise, attribution appraisals are unnecessary or even detrimental in determining taxable market values, as they may not take into account the unique aspects of an individual property.
- The type of transaction can affect the value. Market values can also be affected by the nature of the transaction and its participants. For example, REITs set purchase prices for real estate portfolios based, in part, on tax considerations. Similarly, when a transaction involves the acquisition of an entity that owns different types of assets, the price paid will include payment for assets other than just real estate. Non-real estate motivations for purchasing properties and the non-real estate components of a transaction must be removed in order to determine the market value of the real estate alone. Otherwise, real estate values will be above the market.
- Only real estate is subject to property tax. As mentioned earlier, real estate portfolios will sometimes be associated with other assets. These can include personal property, such as fixtures and fittings, or intangible assets and rights such as contracts, licenses and goodwill. The market values of these non-real estate items are assessed differently from those of real property and some, such as intangible assets and rights, are not subject to property tax at all. Additionally, any “synergy” or “accelerative” value from a portfolio sale is intangible and should be excluded when assessing the value of a specific property for property tax purposes.
- Properties may not stabilize at pre-pandemic levels. Properties that have been hardest hit by COVID-19-related changes may take years to return to pre-pandemic performance levels, and some may never fully recover. Awareness of a particular industry’s recovery will be key to understanding whether market values and property tax assessments for that type of property will return to pre-2020 levels. Uncertainties over the stabilization timeframe reduce real estate values . The knowledge that some properties may never reach pre-pandemic performance levels calls into question the long-term investment value, which lowers the current value of these properties and lowers their assessed value.
- Values of leasehold interests may not match the market. Investors buy and sell commercial properties based on the net income they produce. However, if the leases generating this income are above or below market, the value derived from the rents will not be at market. In addition, rental rates for synthetic or operational leases used to finance the purchase of a portfolio of properties will not produce market value for individual properties unless those rental rates are set at market levels. .
- If all else fails, file a property tax appeal. Taxpayers who work proactively with their local tax assessor are often able to obtain reduced assessed values and lower property tax bills. Owners should discuss each of the previous six points with the local assessor. However, there will be times when attempts to reduce evaluated values will fail. In these cases, landlords should be prepared to file an appeal before the deadline and pursue it, preferably with the assistance of a knowledgeable property tax advisor.
Cris K. O’Neall is a shareholder of the law firm Greenberg Traurig LLP, a California member of the American Property Tax Counsel, the national membership of property tax attorneys. He can be reached at [email protected]