Property tax in focus
Three keys to increasing the accuracy of your valuations and assessments
Property taxes are back on the agenda for many corporate taxpayers as commercial real estate fundamentals continue to diverge by asset class, office values remain under pressure in many markets while industrial and multifamily show comparatively stronger performance and higher interest rates have reset pricing and cap-rate expectations. With assessors often relying on historical inputs and assessment cycles that lag current conditions, valuation support is being tested more frequently, contributing to a sustained uptick in disputes and appeals focused on whether assessed values reflect today’s income, vacancy, and financing realities.
To be appeal-ready, taxpayers should maintain a complete documentation package (rent roll, leasing and downtime evidence, net operating income bridge with support for key assumptions, and market comps/financing terms) that clearly ties property-level performance to value.
Variable economic conditions bring new opportunities
Economic conditions are creating new opportunities and new pressure points in property taxation. Even as markets feel closer to “normal,” inflation, interest-rate-driven repricing, and uneven real estate fundamentals continue to complicate property value support. Work patterns have also settled into predominantly hybrid models, which has meaningfully changed how offices are used and valued.
As a result, property values and property tax assessments are less consistent than they used to be, and future assessments are likely to depend more on the specific property, the asset type, and the local valuation rules and timelines where it sits. In that “it depends” environment, taxpayers often have a strong reason to revisit assessments and—where the facts support it—appeal and potentially reduce the overpayment of property taxes.
Three key considerations for reaching an appropriate property tax assessment
Valuations depend on the particular jurisdiction and whether the property will be valued on a local basis or on a central/state level. Jurisdictions may be open to changing valuations despite—and because of—uncertainty about how to assess property values in light of rapidly changing markets. What should you keep in mind as you work with property tax assessors to arrive at property valuations and tax assessments?
1. The importance of being proactive in working with property tax assessors
With property tax valuations being subject to interpretation, the first assessment should be reviewed to determine whether it needs to be adjusted. Being proactive in seeking reassessment of real property is essential. In the current environment, there may be uncertainties because of fluctuations during and after the pandemic. It is important to act early. Even in a more settled business environment, waiting for the assessor to make the first move may not be the best strategy. The ever-accelerating speed of business may lead to more businesses seeking redress, and there may be more appeals activity than usual. On the one hand, tax assessors may be more willing to revise an assessment following an appeal, because there will likely be many taxpayers experiencing the same challenges and seeking valuation changes. But on the other hand, more requests may mean assessors will have more on their plates and less time for each appeal. This is why it is essential to come prepared with your proposed revaluations and the reasons for them.
Regarding your communications with assessors, one potential pitfall is overcommunicating. Consider assigning one or two points of contact from your organization to avoid the risk of creating confusion from too many people sending too much information or mixed messages.
2. How a diligent approach can impact the outcome
Your organization likely has the most up-to-date metrics about your operations and can draw on this valuable data to build a case. Providing meticulous, detailed, and comprehensive data can instill confidence in the validity of your metrics and propriety of your proposals.
In building your case, it is important to avoid common pitfalls, including, providing complex information to assessors without explaining or clarifying it. Tax professionals often assume that assessors—who work in a division specific to their industry—are familiar with all the intermediate steps of their industry-specific argument and do not need to be taken on the journey.
That assumption may not be accurate. Many assessors are incredibly busy. As a point of courtesy, one should walk assessors through the steps of the argument and underscore important details which can make it easier for an assessor to make proactive adjustments.
3. Anticipating discrepancies resulting from applying an incorrect method
While differences in data can lead to valuation inaccuracies, so can differences in methods used by assessors. Anticipating and identifying the most common discrepancies can have a substantial impact on the final results.
Applying the wrong valuation method (or applying the right method incorrectly) is a common source of gaps between a property’s assessed value and what the market evidence would support. In U.S. property tax, assessors generally rely on one or more of three approaches: sales comparison, income, and cost and different property types are better suited to different approaches. When the method doesn’t match the asset’s economics, the resulting value can be materially overstated or inconsistent with comparable properties.
For example, assessors often focus on contract rent when in the current economic environment capitalization rates often lead to a more accurate reflection of current market events. Although capitalization rates are a measure of risk, the challenge is identifying and applying the right capitalization rate that appropriately reflects risk to capitalize the income stream into a value that can be assigned to that property.
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.
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.
