Property tax plays a significant role in commercial real estate development, but many CRE professionals do not think about it until the tax bill arrives. A property owner or manager often takes a look at the amount due and the due dates, then inserts them into the company’s financial function for payment.

There are several things wrong with this picture.

It is usually too late for professionals to do anything about taxes once the bill arrives. They need to take action as soon as they receive an assessment notice earlier in the year.

By treating property tax as a fixed cost, people miss the opportunity to evaluate and manage the factors that contribute to, and potentially reduce, this cost.

It is crucial to pay close attention to the dates and details provided in the property tax assessment notices. This can help determine whether or not they warrant an appeal. There are several factors that can affect value.

Valuation Methods

There are three valuation techniques used in appraising commercial real estate: cost approach, income approach and sales approach. It is important to understand the following appraisal methodology.

1. Cost: The cost approach estimates the value of the land as if it were vacant and adds the cost of construction minus 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.

2. Income: The income approach determines value by estimating annual rent and typical expenses and applying a market capitalization rate. In many locales, taxpayers must supply income and expense data. The commercial property owner should identify every expense related to property operations.

3. Sales: The sales approach uses a database of market transactions for comparable properties. This is a common approach in larger jurisdictions.

What Impacts Value? 

There are a number of factors that can affect the value of a property. Some are specific to the condition of the property itself and neighborhood. This might include age, deferred maintenance, environmental issues, ingress/egress issues, vacancies and declining rents. Other factors might reflect the economy. It is important for commercial real estate professionals to consider specific economic conditions before undertaking a property tax assessment.

E-commerce has also had an impact on the assessments of the traditional retail model of malls and strip centers. Business foreclosures are contributing to a glut of property and an abundance of vacant buildings, which is expected to decrease property valuations.

In the office asset class, businesses are expanding and seeking out modern buildings. This creates vacancies in older office parks and complexes. Assessed property values for most older buildings do not consider vacancies, which may be understated in the property tax assessor’s estimates. Property owners and managers of older office locations, especially those with vacancies, may reconsider appealing property tax assessment.

Meanwhile, multifamily properties owners have been hit with property tax increases over the past few years, a trend that is not going away anytime soon. The multifamily market is booming, which means vacancies are at an all-time low. While owners and managers may not be able to renegotiate their local assessment, it is worth getting an evaluation. There may be small considerations that were not accounted for in the property tax assessment.

How And When To Appeal Assessments And Tax Burden

Property owners and managers can be proactive about their property tax evaluation and analyze what they owe before receiving an assessment. Proactivity ensures enough time to perform the analysis. If a review is triggered by receipt of the assessment, an owner may have to develop its case within a short time span.

There are specific filing deadlines that vary by jurisdiction. In some jurisdictions, deadlines are as soon as 15 days from the receipt of assessment.

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. If a firm does not have the in-house capacity, it may consider employing outsourced expertise, such as a tax adviser or consultant.

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