Most shopping center owners are being over-taxed and do not even know it. Or they do not realize it until they get their tax bill. The problem is in the way taxes are figured by local assessors — a methodology that was only adequate, at best, during good times, but which has become a severe handicap to landlords during this lengthy economic downturn.
In most states assessors take a mass-appraisal approach, trying to determine as quickly and ubiquitously as possible the fair market value of all the shopping centers within a tax district using existing data. The assessor is looking at the market value of the property based upon fee-simple value, which is the value of the real estate without encumbrances — that is, what it would sell for if it were vacant and available for sale or lease at market rates.
“The reality is, there are few cases of commercial property selling where you have a vacant building for sale without encumbrances,” said Kieran Jennings, a Cleveland-based partner at Siegel, Siegel, Johnson & Jennings. “Typically, it is partially occupied, fully occupied, et cetera. Often there are deed restrictions in place.” Jennings is a member of the Washington-based American Property Tax Counsel, which assists property owners in the U.S. and Canada with tax issues.
“Assessors will look at a market, they will review published sources on cap rates, et cetera to come up with a model that will be used on shopping centers across the board,” said Darlene Sullivan, a partner at Austin, Texas–based Popp, Gray & Hutcheson, and also a member of the APTC. “They have to get their numbers out quickly and apply the model without looking specifically into any condition.”
There are two general ways overtaxing occurs. The first is the time-lag effect of a slumping market, and the second involves the lease adjustments often made to keep tenants in place, but which assessors do not take into account.
Landlords must diligently review property taxes yearly, looking at assessments based on current marketplace conditions, says Michael Shapiro, a Detroit-based partner at Honigman Miller Schwartz and Cohn, and an APTC member. “My clients are fighting assessments,” he said, “because assessors were ignoring the functional obsolescence of their properties, which in some cases meant a 50 percent reduction in value.”