Property tax in focus

It is safe to say that property taxes have not been a major focus for many corporate taxpayers since the height of the Great Recession. The largest component of state and local tax liability for companies in the US, property taxes have long been a function of economic trends and conditions. Since the recovery from the Great Recession began, property taxes increased steadily over the next decade, ending in 2020.

Times have changed

Since 2020, the economy has been anything but steady—or predictable. The past three years have brought seismic shifts in the trends that influence property valuations such as real estate prices, supply and demand, and occupancy rates for many kinds of property—from hotels to offices to retail space. As a result, valuing property for tax purposes has become much more complex and nuanced.

Variable economic conditions bring new opportunities

While economic conditions appear to be returning to something resembling normalcy, trends such as inflation, real estate prices, and workforce models continue to create a great deal of uncertainty. Workforce models have rapidly changed from onsite, to fully remote, to now mostly hybrid. Office occupancy, as a result, has swung from near full occupancy to 100% vacant to now anywhere in between. While not widely reported, in our experience, physical occupancy of office space is often in the 30-40% range as hybrid models are implemented.

The result is ongoing and extensive variability in property valuations and tax assessments, with future assessments likely to be more situational than in past years based on industry, jurisdiction, and other factors. This fluid situation may create new opportunities for tax valuation reassessment, and potential tax savings.

Industry differences

It is also worth double-checking that the correct industry method is being used, since valuations vary by industry. A number of industries, such as manufacturing, energy, transportation, retail, and hospitality, have undergone substantial changes to their valuation models. Using an incorrect industry method may result in an inaccurate valuation. The traditional model for all industries seeks to apply a fair market value (FMV) for all real and personal property assets that a jurisdiction uses to create a taxable fair market value. The taxable value is then multiplied by the local millage rate to ultimately create the property tax bill. The three traditional methods of appraisal are the cost, market, and income approaches to value.

Manufacturing, energy, and transportation are impacted by operating efficiency. These industries can be impacted by all three approaches to appraisal/valuation. Income producing properties, such as retail and hospitality, are generally appraised on the income approach to value.

Green and renewable industries have a different set of challenges. For example, traditional valuation models could be incorrectly applied to certain renewable and green industry businesses, resulting in inaccurate valuations. While these businesses are rapidly increasing in number, the majority of business taxpayers are still in traditional industries. Therefore, assessors may tend to apply traditional valuation models focused on declining costs even with renewable assets.

Renewable assets such as battery storage have inherent complexity, including the obsolescence of technology and declining efficiency so it is often worth challenging the use of a traditional approach for these assets.

Occupancy trends will determine how real estate is valued going forward, but it could take a few years before it is known how flexible work arrangements will affect occupancy and property tax rates.

Because facility usage changes have impacted many industries—before, during, and after the pandemic—consider seeking to reassess and reduce property value to reflect such changes. Understanding the processes and procedures within local assessment communities is important in this effort.