Happy New (Property Tax Assessment) Year!

Typically, there is a lag of several months between the January 1st valuation date and a jurisdiction’s appeal deadline.  A leading practice for management of property tax liability is to document contemporaneously with the jurisdiction’s valuation date any factors that might impact the assessment of the property.  A few of the key areas that owners of commercial real estate should review as of January 1st include the physical condition of their property along with their rent rolls.

What is the physical condition of my property on January 1st?

Owners and users of real estate should be mindful of any major repairs that are contemplated but have not been initiated as of January 1st.  Common examples of deferred maintenance include replacing an old or damaged roof, repaving a parking lot, and upgrading a worn-out HVAC system.  Assessing authorities are generally not aware of deferred or planned maintenance for properties, but such maintenance can have an impact on the market value of the property for ad valorem taxation purposes.  Assessors are tasked with determining some measure of market value, or what the property would sell for in the open market in an arms-length transaction.  If a building has major roof damage, generally either the seller would replace the roof before the sale or the buyer would adjust their offer knowing that they would incur significant expenses for the new roof.  In either case, the market value of a property in need of a new roof would factor in the cost to complete the work.  Many assessing jurisdictions would be open to reviewing the cost of deferred maintenance in determining the assessable value of the property. 

What do my occupancy rates look like as of January 1st?

The vacancy rate as of January 1st is one of the quickest ways to evaluate a property’s performance and value as compared to the prior year.  Vacancy considerations can also be a straightforward method of obtaining relief from assessing authorities as occupancy rates are objective and clear indicators of the economic health of a location or market.  Assessors generally do take into account a market vacancy rate for each property type and geographic submarket and apply that rate to all properties in the same cohort, regardless of occupancy.  Mass appraisal techniques do not allow for adjustments to vacancy rates for individual properties, however, which means that property owners will need to be proactive in notifying assessing authorities about below-market occupancy rates.  Assessing jurisdictions will sometimes consider the loss in income during the time it takes to lease up the property and then factor that loss into an income-based valuation.

What is the quality of my rent roll as of January 1st?

For owners of multi-tenant retail properties, the tenant mix can be a major driver of property value.  Tenant mix is a more subtle valuation issue than deferred maintenance or vacancies.  Owners of retail centers with tenants that have filed for bankruptcy recently, or have announced a risk of filing for bankruptcy, may have an opportunity to pursue property tax savings as there is typically an inherent risk of increased vacancy, which would tend to decrease the relative value of the property.  In contrast, a retail center with credit tenants (i.e. tenants with very high credit ratings) locked in for longer lease terms would likely command a higher sale price than a center with non-credit tenants or tenants with lease terms expiring in the near future, even assuming similar rents and locations.  Such a difference in market value would result from perceived risk to the investor, which is usually accounted for in the capitalization rate of an income-based valuation.  Generally, assessors will have a range of capitalization rates for a property type, depending on location, age, quality, etc.  Perceived risk due to tenant mix has some elements of subjectivity, so it may be more difficult to achieve reductions solely based on tenant quality.  However, any factors that affect market value should be mentioned during discussions with assessing authorities.  Tenant quality is also a consideration for multi-tenant offices and industrial distribution facilities, but most typically comes into play when looking at retail properties.

A new property tax assessment year may not be the most festive of occasions, but taxpayers will set themselves up well for the assessment cycle by taking stock of their properties as of the relevant jurisdiction’s property tax valuation date.

Authored by Lucas Quary and Debbie Loesel, Deloitte Tax LLP | February 2024