By Darlene Sullivan, partner, and Justin Raes, tax cunsultant, Popp Hutcheson PLLC
While some commercial property types struggled to stay relevant in 2020, industrial real estate seemed supercharged by the pandemic. This year, tax assessors are likely to use strong investor and occupier demand for some industrial properties to support significantly higher assessments for all industrial real estate. They may see this as a solution to make up for value losses in the hospitality, retail and office sectors. That means industrial property owners should prepare for major assessment increases and begin building arguments to establish their properties’ true taxable value.
![Darlene Sullivan, Popp Hutcheson](http://rebusinessonline.com/wp-content/uploads/2021/05/54367.jpg)
Darlene Sullivan, Popp Hutcheson
E-commerce in Perspective
If e-commerce was rising before 2020, it skyrocketed after the initial shock of the pandemic. The e-commerce share of total retail sales jumped to 16.1 percent at the end of the second quarter of 2020 from 11.8 percent in the first quarter and 10.8 percent a year earlier, according to the Census Bureau. As e-commerce grew, so too did industrial leasing demand, as online retailers secured spaces to process incoming goods and fulfill orders for shipment to consumers.
The e-commerce operations driving the surge in demand brought with them a list of demands to serve their logistical plans, however. Their preferences typically included locations close to major transportation corridors, proximity to their customers for deliveries, high ceiling heights and other traits necessary for handling the rapid growth of logistics-related technologies.
For 2021 industrial property tax appeals, it is important to understand that not all industrial real estate is equally suited to meet the demands of e-commerce operations. In practice, occupier demand that makes some properties more valuable will often lower the marketability and value of properties not fitting that demand. This, in turn, can affect a property’s taxable value.
![Justin Raes, Popp Hutcheson](http://rebusinessonline.com/wp-content/uploads/2021/05/43637.jpg)
Justin Raes, Popp Hutcheson
A Checklist for Appealing
The following are issues to consider in 2021 industrial property tax appeals:
Pick the right approach. There are several appraisal methods that assessors can use to value a property, but taxpayers should pay special attention in 2021 to the sales comparison approach. Though Texas is a non-disclosure state, meaning the state does not require a buyer to reveal the purchase price for acquired real estate, assessors have tools at their disposal to obtain or back-into purchase prices.
For tax year 2021, it will be important to note that although there may have been a few transactions, overall industrial sales volume generally declined from the prior year’s numbers among the major metropolitan markets. In the second quarter of 2020 especially, the drop off in sales indicate that lenders and investors had to reevaluate the market and their underwriting assumptions.
For the sales comparison approach to value properties accurately, the properties and transactions used as evidence need to be comparable to the subject property. If that is not the case, calculations may place an unnecessary premium on the property.
For example, sales of warehouses with cold storage capabilities should not be directly compared to a conventional warehouse without a cold storage component. Thus, if an assessing jurisdiction raises an assessed value based on limited sales information, chances are the sale is not representative or comparable to the taxpayer’s property. The taxpayer should consider raising this issue in their property tax appeal.
Consider property age and class. The industrial real estate sector serves a wide variety of uses that require special buildouts or designs that must be completed for the intended tenant to conduct their business effectively. For example, older, Class C industrial buildings tend to have smaller square footage and lower ceiling heights than more modern spaces. With the rising cost of transportation and emphasis on logistical efficiency, these attributes make Class C properties less marketable than newer, Class A or B industrial buildings.
According to CBRE, the warehouses built in 2019 are typically greater than 100,000 square feet and have ceilings that average 3.7 feet higher than warehouses built between 2002 and 2007. The increased space is primarily for more inventory and reverse logistics for returns.
In addition, the newest buildings feature more bay doors and parking space for large trucks. If the assessor is comparing properties and valuing a 2002-built warehouse the same way as the newer product without adjustments for class and age, the taxpayer may have an additional issue to raise in their appeal.
Location is critical. Location is becoming more important than ever to the tenant. Since land is more expensive the closer it is to the central business district of any city, the potential for using the space efficiently becomes more crucial as well. Assessors may increase the value of properties that are close to these markets.
E-commerce businesses demand locations that can speed last-mile deliveries to consumers. Proximity to transportation corridors is a significant advantage for tenants because it improves the timeliness of the supply chain. If an industrial property does not meet current demand because of its location, that may be an avenue for relief from increased property tax valuations.
Is rent paid, or deferred? Governments have deemed some industrial real estate tenants to be essential businesses during the pandemic, and this has limited the disruption of rent payments to certain landlords. During property tax appeals, it will be important to highlight the properties that suffered decreases in net operating income and occupancy, so they are not treated like the properties that saw no disruption in rent payments.
Owners of industrial properties may be able to fight and defeat the property tax increases potentially heading their way. Keys to winning assessment appeals will include following the industrial trends and being able to distinguish the taxpayer’s property from the desirable properties that are trading, possessing evolving technology, being in the right location and collecting strong rents.
Darlene Sullivan is a partner in Austin, Texas, law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel. Justin Raes is a tax consultant at Popp Hutcheson. This article originally appeared in the March 2021 issue of Texas Real Estate Business magazine.