Lagging Indicator: RE Assessment Appeals

Tis’ the season to be grouchy….if you are a real estate owner trying to figure out why your real estate taxes on your half empty building are so friggen high. As is the case with homeowners, or taxpayers of other varieties, commercial landlords find themselves ensnared in bitter wars against the municipalities in which their properties reside regarding the amount of taxes they must pay.  The issue is simple:  Municipalities want to get their fair share of property taxes.  The best way to do this is to levy taxes based upon values when times are good.  If buildings are full, NOI is high, and thus values are at their peaks which means more revenue for the municipality.  But when occupancy slips, NOI suffers and values go down….yet the real estate tax assessment doesn’t, and therein lies the problem. And you wonder why the municipalities only assess buildings “occasionally”….

The assessment appeal season is fast upon property owners, tenants and property managers in the Philadelphia area, as well as elsewhere throughout the country.  Tentative assessment ratios will be issued in June and finalized as of July 1st with typical county assessment appeal deadlines falling in August or September (October for Philadelphia).  Most counties are anticipating some of the highest levels of assessment appeals this year based on the economic conditions that have been in place and the specific negative effect on the real estate market.  In this current market climate, it is imperative for property owners, tenants, management firms and brokers to be pro-active in reviewing assessment values.

Last time we checked there re only two ways to increase NOI….increase income or decrease expenses. With most landlords having to offer prospective tenants concessions left and right, we don’t see income being increased dramatically anytime soon. Yet, fairly assessed properties with lower real estate taxes are more competitive in attracting and retaining tenants and more appealing for potential disposition and acquisition purposes.   While most expenses are fixed, tax assessment appeals also offer one way to obtain expense relief for landlords struggling to maintain their cash flow.

The obvious solution to this problem would be getting county tax assessors to assess property more frequently, so the tax bills more accurately reflect the current state of the property itself.  But like any government, most counties would laugh that one off, claiming they do not have the appropriate resources to do such a thing.

Well here is Llenrock’s stab at a solution.  If tax assessments for commercial buildings were separated and accounted for based on the profitability of the building, and not necessarily the size or location of the parcel of land the building is on, you would have a lot fewer appeals.  In regard to how the county could accurately obtain the true condition of the property’s income, they could require a certified rent roll from the landlord on an annual basis.  They could then gain the additional benefit of cross referencing these rent rolls for accuracy with the businesses associated with them.  This would additionally ensure the local governments are obtaining all appropriate business taxes from business operating out of every commercial building within their municipality.  And if businesses absent from a  rent roll were otherwise found to be operating out of a particular property, they could subject landlords to additional fines and penalties for trying to fool them just to keep their taxes lower.  The time saved from having to process appeals alone would be enough to implement this type of system without adding additional cost to the process.  While the specter of whether everybody would be better off for it is subject to which side of the proverbial fence you sit on, you certainly couldn’t argue that it is unfair. What do you think?

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