Today's guest blog post comes courtesy of Anybill partner and tax consulting firm Property Valuation Services (PVS) and explains why real estate appeals are a crucial consideration for property tax in 2021.
The reality of 2020 stood in stark contrast to what we anticipated it would be. With a worldwide pandemic and the accompanying economic downward spiral, this past year brought hardships none of us were expecting. The entertainment and sports industry virtually shut down, taking away a lot of guilty pleasures and would-be distractions during quarantine. Of course, we cannot overlook the seemingly now forgotten murder hornets!
I have to wait a lot longer to find out what happens to my favorite TV character while once again significantly raising my level of stress just sitting still and watching a television show. I have to wait a little longer to once again open the doors of my local movie theater to the magnificent aroma of movie theater popcorn. I will wait a little longer to take any vacations or ride in an airplane. I will wait a little longer to pack my large back deck with volumes of friends like we used to. And I can hardly wait for the day when I can cheer on my favorite professional soccer team chanting at the top of my lungs with 15,000 others screaming “ I believe that we will win!”
Along with movie theaters, entertainment facilities such as bowling alleys and arcades became too risky to remain open and also temporarily shut down. Office buildings sat empty as we had to learn to work from home. Hotels lost occupancy due to business travel shutdowns and halted vacations. Retail centers closed their doors (some temporarily and some permanently), manufacturing slowed, and even healthcare facilities took a major hit as their revenue generating customers stayed home while they made room for the emergency care of COVID-19 patients.
Nearly every type of business, large and small felt the pain of the pandemic. Kudos to our government for offering assistance to try and mitigate this pain, but we still saw too many unable to stay above water. Businesses closing and lost jobs lead to one of the largest hikes in unemployment in history and struggling families became an all-to-common news story or beginning of a conversation. The worst feeling for a struggling business is to receive unexpected expenses that they were not prepared for. The phrase “What are we going to do,” could be heard echoing throughout an eerily quiet United States.
So the drawback was that most real estate owners were shocked to find their property taxes actually went up instead of down in 2020. As frustrating as that is to think about, the unfortunate bottom line is that properties are typically valued as of January 1 in any given year so even though we were hurting starting in March, we still had to pay higher property taxes. Nothing like being kicked while you’re down, rubbing salt into the wound, adding insult to injury...well, you get the idea.
How Properties are Valued
County Assessor's value properties in one of three potential methods. The first method is a direct sales comparison approach, like selling a house. The Assessor reviews sales comparisons of similar properties to determine a fair market value. The second method is called a cost approach, which is essentially looking at what it could cost to rebuild the same building on the same land. The third approach to value is an income approach. This can get complicated; however, the general idea is that we can look at the building’s income production as a factor in increasing or decreasing the property’s value.
This process is far from simple. Some states and counties are fairer than others. Different states have different revelation cycles; so some revale every year while others rotate counties on eight-year cycles. Some jurisdictions are easier to work with on appeals while some are more difficult and require a court appearance or attorney’s involvement. Most seem to have things figured out while others have been vehemently criticized for their lack of reasonable support for value increases. Jackson County Missouri (resident county of Kansas City) had a class-action lawsuit brought against them in 2019 for their surprising and irrational value increases. In fact, the Kansas City Business Journal posted an article recently with the excerpt:
“Jan 13, 2021, 9:00am EST
Jackson County, which previously received criticism for its appraisal process, has signed a $17.9 million contact with a Texas company to provide appraisal software and services.”
Property Valuation Services was published in Industry Today last year with an in-depth explanation as to what effect the economic impact of COVID-19 would have on commercial property taxes going forward. This article can be found here if you would like to learn more. There is also an update to this article on the Industry Today website.
Here is an excerpt from Kent Hileman’s article in Industry Today:
“The Income Approach, as is utilized by most commercial investors, is forward looking. It’s the investor asking herself or himself, what will be my future revenues and operating expenses from this property, i.e. what is my net operating income (NOI), and how long will I hold this investment? It is essentially the NOI related to all those future years during the holding period, discounted back to present value, plus the present value of selling the property at the end of the holding period (return on and return of the investment). Now, most investors don’t go through that whole calculation in their head or on paper, they look at one year’s NOI (projected year 1) and capitalize it into a value using a Capitalization Rate. The Capitalization Rate is taken from similar properties in the market and is simply calculated as NOI / Value = Cap Rate. Also, for reference, NOI / Cap Rate = Value. But, even using the one year and capitalizing into value, also known as direct capitalization, it is essentially doing the same thing as forecasting and discounting to present value, just in a more simplistic step / method.”
Why Appeals Will be Crucial In 2021
So, what is next? 2021 appeals are going to be the most important commercial real estate appeals in decades as this will be the first year that the economic impact of COVID-19 will affect property values. We see commercial properties creep up in value year after year, having to be appealed every reval cycle, but this will be the first year values should see significant decreases. But do not be fooled! Just because your value decreases does not mean that your value is fair or as low as it should be.
Obtaining the lowest possible value for your properties is critical in 2021. This will create a noticeable impact on your 2021 bottom-line profitability as well as set a tone for future years’ tax implications. To say this needs to be taken seriously is an understatement. On average, across the United States, the effective commercial real estate property tax rate hovers around 2.1%. That means for every $10M in value your building has, you are paying over $200,000 in property taxes.
Considering what has happened over the past year, Property Valuation services can use the income approach to argue significant decreases in value in 2021 appeals and therefore find extensive property tax savings for our clients. With properties in all 50 states, nationally recognized and licensed consultants and MAI Appraisers on staff to add expertise to our already impressive level of credibility, Property Valuation Services is known as one of the leading property tax consulting firms in the country. On top of that, we have published experts on the impact COVID-19 will have on commercial real estate valuation.
So, let’s remember what is important in our lives as there is now a light at the end of the tunnel. Three separate COVID vaccines are being distributed, virus numbers are on a serious decline, our favorite restaurants and other activities are open again, they are filming the next season of most of our favorite shows to binge-watch and the murder hornets ended up not even being a thing! We will not even mention the frozen week when apparently somebody seriously upset Elsa, Tiger’s driving, or the Chiefs losing the Superbowl...because now we are looking at the bright side. We will finally see the negative impact on our economy begin to turn around.
Commercial real estate property values should see a significant decrease in 2021. It’s crucial to make sure to partner with the right experts so that you can rest assured your property tax liability will be as low as possible.
How Property Valuation Services Can Help
Whether you own or operate a healthcare facility, hotel, apartment complex, office building, retail center, manufacturing/industrial property, golf course, entertainment building, theater or restaurant, I hope you have been able to navigate this past year. Best of luck going forward as we start walking in the sunlight again, and best wishes for this upcoming tax season. For additional information on how Property Valuation Services can assist in using our expertise to bolster your 2021 bottom line by reducing your property tax liability, please contact us here.