All segments of the economy have been affected by the recent severe financial downturn, perhaps none more so than the real estate market. Shopping center owners and operators have grown all too familiar with the poor economic forecast, but there may be a silver lining to the weak market conditions in the form of property tax appeals. The assessed value of retail properties most likely was set before the economic downturn, so it probably does not reflect current market values. Since taxes are based on a property’s market value, as valuations decline, owners and operators can challenge the assessment of their property in order to reduce their real estate tax burden.
The prospects for retail properties in 2010 are not strong, even with indications that the start of a recovery is here. According to Moody’s Investors Service (November, 2009), the All Property Type Aggregate Index recorded a 3.9 percent price decline in September. The index now stands at 42.9 percent below its October 2007 peak. Overall market transaction volume has consistently remained low throughout 2009, with transaction counts totaling less than 400 and average dollar volumes of less than $4 billion per month. All commercial property types have seen a 25 percent to 40 percent valuation decrease.
Since commercial real estate is typically valued by the income approach (which capitalizes net income to arrive at a value for the property), as income generated by the property declines, so too will the value of the real estate. Fewer retail property sales and the decline in 2009's median sale price continue to reflect the depressed real estate market. As investment in income-producing properties becomes riskier, capitalization rates may increase, which can also put downward pressure on real estate values.
These factors may collectively lead to a continuation of reduced real estate valuations; however, the assessed value of retail properties for which real estate taxes are calculated may have been set prior to the economic downturn and thus may not reflect the current weak market conditions. Since real estate taxes generally are calculated based on the market value of a property, owners and operators of retail properties have the opportunity to examine the existing assessment for their property and potentially reduce their real estate taxes.
Real estate taxes are typically calculated by first determining the market value of real estate as of the relevant assessment date and then applying the tax rate. A key factor to any valuation analysis of commercial properties is the income that can be generated by the property. As the income and valuations decline, so too should the property assessment and real estate tax. Owners may be able to reduce the real estate tax assessed against the property. Additionally, the assessment process gives a property owner an opportunity to review the tax assessor’s records to ascertain the basis for, and accuracy of, the assessment. Since reassessments are not typically done on an annual basis, the tax savings achieved by an appeal can extend until the jurisdiction completes its next reassessment. In some instances, the savings may continue for many years.
As owners of commercial property experience reductions in income and the accompanying decline in the value of their real estate, often the only available remedy is to pursue a real estate tax appeal to reduce operating expenses. As with most legal proceedings, there are pitfalls; before filing an appeal, owners should consult with a qualified tax specialist. In fact, some jurisdictions require that property owners be represented by an attorney. If an appeal is successful, the tax savings may be retroactive to the first year for which an appeal is filed and interest may be payable on the tax overpayment. Give the review and analysis careful consideration in order to avoid needless and potentially frivolous litigation. If an appeal is filed without cause, it can in some instances result in a tax increase.
The appeal process generally starts with the review of the case and the filing of a complaint or petition of appeal. Appeal deadlines vary by jurisdiction and may be set by the state, county or local municipality. In order to begin the process, owners of retail properties should familiarize themselves with the real estate tax appeal rules and procedures for their relevant jurisdiction and analyze tax records and market data to determine whether a property tax assessment should be appealed. If an appeal is warranted, it is incumbent upon shrewd owners and operators of real estate to review and become familiar with the appropriate steps to potentially lower one of their largest annual operating expenses.
— Daniel Pollak is the chair of the Real Estate Tax Appeals Practice Group of Roseland, N.J.-based Brach Eichler.