COVID-19 Impact on Commercial Property Taxes - The Bad, the Good and the Ugly

The Bad

The COVID-19 pandemic has created a time of great uncertainty that has intensified pre-existing political and economic uncertainties, and has severely disrupted commercial real estate operations, ideally for the short-term. Focusing solely on the shape and timing of an economic recovery, the impact of the pandemic on the valuations of commercial real estate is difficult to quantify today.

A key question being asked by many commercial owners is how will the pandemic impact property taxes going forward? What can I do? Will assessors grant reductions in assessments due to the pandemic?

What we do know is federal, state and local governments will be experiencing massive budget deficits in 2020 and 2021. The need for revenue from all sources will be at an all-time high while property taxes are the most stable and greatest funding sources of local revenue.

Simplified, increases in government spending combined with a reduced tax base equal increases in property tax rates. A tax rate increase that exceeds any value reduction, means paying more in property taxes.

The Good

Most commercial property owners should expect a value reduction to occur beginning with their 2021 assessments. The key question is how much of a reduction should be expected and what should the taxpayer do to obtain an assessment that is reflective of post-pandemic markets?

Intensified coordination between ownership’s leasing, asset management and property tax professionals will be critical to equitable post-pandemic valuations. Property income and expense statements/rent rolls are one-dimensional data, and without an active narrative to make them 3D, value reductions opportunities will be lost.

Examples of useful, real-time data include:

Hotels

• Monthly ADR and occupancy stats demonstrating the impact of the pandemic
• Providing reduced group booking and transient occupancy schedules as compared to prior years
• Comparable property sales
• Commercial mortgage-backed securities (CMBS) nuances

Destination resorts, business travel dependent hotels and conference centers face magnified losses.

Retail 

• Tenant bankruptcies
• Store closing
• Vacancies
• Delinquent/abated rent collections
• Co-tenancy clauses
• Anticipated vacancies
• Asking rents/incentives for vacant space
• Tenant sales
• COVID-19 capital costs
• Obsolescence
• Comparable property sales
• CMBS nuances

Retail occupancy faces greater headwinds than just online sales. Record tenant insolvencies, requests for single year leases paying gross or percentage rents, tenants abandoning spaces, rethinking community destinations, and many centers facing survival thresholds magnified by debt obligations.

Office

• Up-to-date vacancies
• Delinquent rent collections
• Anticipated vacancies
• Asking rent for vacant or sublease space
• COVID-19 capital costs
• Comparable property sales
• CMBS nuances

New COVID-19 spacing requirements (offices/elevators), work at home options, commuting options, decentralizing trends, workforces leaving congested areas, increases in sublease spaces, fallen demand and lease deal velocity.

Capitalization Rates/Sale Transactions: Real-time market events will be critical to establish market parameters for valuation setting. Producing/packaging information by experts will be the most persuasive evidence for equitable market value.

The Ugly

Even if an owner compiles a compelling valuation argument and is successful in achieving a valuation reduction, it does not mean their property taxes will be reduced commensurately. In projecting property taxes for tax year 2021, the key considerations to keep in mind are as follows:

• Assume voters get any relief/reductions firsts. Commercial will continue to carry a disproportional load of the tax burden.
• Jurisdictions that follow non-annual valuation cycles may not permit appeals until the next schedule revaluation. What is your local practice?
• COVID-19 reductions in 2020 will, in most jurisdictions, not occur because of the valuation date of January 1, 2020. Some states use other valuation dates. When are your values set or taxes paid?
• Jurisdictional budget deficits will likely result in property tax rates increasing in 2020 and 2021. This will be driven by jurisdictional COVID-19 expenses and lost variable revenue sources, including state contributions, sales tax, transfer taxes and the cost to retro fit schools. Are your local teams monitoring the local rate setting processes?
• Expect resistance/reluctance by jurisdictions to grant reductions unless long-term trends can be established by ownership. That includes income (actual and pro-forma), and comparable sales. Does your representative have access to this information, and can they package it?
• Property taxes will likely increase in most jurisdictions unless a reduction in assessed value is greater than the property tax rate increase. Across the board discounts of 10% on all real estate values only increases the tax rate by an equal amount. 
• Owners need to put their best valuation case forward to minimize their property taxes in 2021 and beyond. Superior documentation and aggressive presentations will be required. Historical relationships will count for less. Do you have the right team?
• The volume of future appeals will overload the appeal forums. Expect extended resolution timelines and monitoring. Do you have this reporting system in place?

Every commercial property is unique, but these strategies will assist owner’s in making the best of a bad situation. Duff & Phelps' Property Tax practice has expertise in a wide range of commercial/industrial and investment grade portfolios. A strong brand and experienced professionals make the difference. Our nationwide services include assessment review, appeals, compliance filings, audit support and full administrative services including payments and reporting.