Sewers, Sidewalks And Stadiums — CRE Owners Face A Smattering Of Direct Fees
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If they squint, building owners in Maryland may notice something new on their yearly tax bills: a fee for the Bay Restoration Fund, an initiative to help update the state’s wastewater treatment plants.
Meanwhile, taxpayers in Washington, D.C., are already familiar with the Ballpark Fee, a charge that is paying off the debt for the construction of the Nationals’ new baseball stadium.
Across the U.S., real estate companies are facing new fees that have been tacked on to their yearly tax bills. And unlike property taxes, which are based on fluctuating and subjective building valuations, these fees are not usually negotiable.
“But just because the fees can’t be appealed doesn’t mean there’s nothing to do about them,” said Shane Moncrief, principal and leader of the commercial property tax consulting practice at Ryan.
These fees can be as elusive as they are costly, and keeping track of them — and understanding which ones can be recouped — requires a deep knowledge of local tax environments. Without knowing about the fees in play, building owners and potential buyers may vastly miscalculate their future net operating income and overestimate their buildings’ actual worth.
Where do these fees come from?
Property taxes are typically the subject of long negotiations between school boards, assessors’ offices, local businesses and residents. Because property taxes can exact a heavy financial burden, many jurisdictions have placed a cap on the amount of property tax that can be collected in a single year, or a cap on the tax rate itself to protect local property owners.
However, officials can circumvent these regulations — and the ensuing debate — by assessing extra fees that, while technically not “taxes,” usually have the same form and function as taxes. Often, these fees will be collected by community groups such as business improvement districts, which operate somewhat independently of local governments.
“Jurisdictions see direct assessments as a way to quickly increase their revenue without having to overhaul their budgets or property tax rates,” Moncrief said.
Commercial landlords are being targeted by these fees, especially in states like California, where legislation makes it difficult to increase property tax revenue. Moncrief pointed to a client of his in East Palo Alto — the town government had drawn up a special district that enclosed just a few commercial properties and put it to a local vote to assess a special fee on the property owners. The plan, unsurprisingly, was approved.
The new fee was assessed at $2.50 per SF, Moncrief said, meaning that one of his clients was on the hook for $800K in fees per year, in addition to property and other real estate taxes.
“If you were expecting an extra million dollars every year, suddenly having that disappear is going to seriously change your outlook on your building’s value,” he said.
Is there any way to recoup these fees?
Sometimes, communities enact new fees with a promise to offset the cost with a reduction in property taxes. But because it is rarely in communities’ interests to point out where businesses can pay less in taxes, many real estate owners end up getting charged twice.
“But unless you went out and specifically asked for it, that reduction never came,” Moncrief said. “The 'service fee' was nothing but a hidden tax increase.”
In other cases, it takes some deeper digging to help owners get their money back. Los Angeles County charges fees for water and sewer use, but Moncrief explained that the rates are not actually calculated by measuring how much each property uses, but by estimating their use based on their size and asset class.
“It’s up to us to go and prove the building’s actual water usage and dispute the number the county came up with,” Moncrief said. “Sometimes we have to go the extra mile.”
Can the fees be prevented?
Other times, there is nothing that can be done about these fees. If they are calculated based on square footage or number of units, the only way to get relief is to make sure those numbers have not been misreported. But Moncrief explained that simply knowing that the fees are there is half the battle.
“These fees will often catch owners completely by surprise. This isn’t just the current tax rate, it’s a fee that affects NOI and the valuation of the building for years.”
The only way to have an accurate picture of a building’s value, he said, is to have a deep understanding of the fabric of the local tax environment, not just at the assessors’ offices but within the community improvement districts and the committees that oversee all the fees that local real estate owners will face.
Whether or not the fees go away, though, Moncrief hopes that jurisdictions will become a bit more transparent with their nomenclature.
“A 'special charge,' a 'direct fee,' call it what you want, this is a tax,” he said.
What fees have you seen in your market?