Tax Attorneys Expect A Wave Of Coronavirus Tax Appeals

Commercial property owners are gearing up to challenge the tax valuations of their investments in numbers not seen since the economic downturn last decade, according to interviews with tax attorneys who specialize in these cases.

If successful, these appeals could cause major pain for municipalities around the U.S.

Ohio attorney Nicholas M.J. Ray estimates that calls to his firm, Vorys, Sater, Seymour and Pease, from property owners across different asset classes, are up by around 25% compared with a year ago. He doesn't expect the requests for help to slow down anytime soon.

"Frankly, it wouldn't shock me if the numbers [of tax appeals] doubled," Ray told Bisnow, adding that it is a "reasonable expectation."

"It's one of those things that when times are good, nobody thinks about as much as they should," he said. "We tend to see an uptick in calls when people are starting to have to write a check."

The appeals are likely to be widespread around the U.S. Bisnow spoke to attorneys in Ohio, New Jersey, Pennsylvania and Texas, and they all expect increases in tax challenges over the next nine to 12 months, depending on the particularities of the appeal rules in their states. 

Alan Hammer, who has been a landlord since the early 1970s, expects to join the fray though he is trying to decide how many tax challenges to file. And as a tax attorney who serves the CRE sector — he is a partner at New Jersey law firm Brach Eichler — Hammer is advising his clients to do the same across property classes.

"I suspect a lot of people will be filing tax appeals," Hammer said. "You are going to see a lot of office building filings. You are going to see a tremendous number of retail filings. I would be surprised if anyone in the retail business did not file a tax appeal this year. You will see perhaps more apartments than typical. You will also see more hospitality filings."

Attorneys advise property owners to regularly review their tax bills for accuracy and to challenge valuations they feel are unfair, but this practice will be amplified amid the economic disruption caused by the coronavirus pandemic.

"While every property is supposed to be valued at current market value each year, not every property is," said Stewart Weintraub, an attorney in Conshohocken, Pennsylvania, near Philadelphia. "Property owners should be reviewing their properties every year for valuation purposes. For 2021, because of the crisis, the significance is much greater."

The steep decline in the price of oil is exacerbating issues caused by the pandemic in the Texas CRE market, according to Dallas attorney John Brusniak Jr. 

"It was going to be a heavy year for appeals anyway," he said.

Texas is the seventh priciest state for property taxes, according to WalletHub. New Jersey tops the list of most expensive tax markets.

Commercial property owners are arguing that their holdings have been "damaged" by the pandemic. The strategy has had mixed results. California officials are considering the argument but it was rejected by Texas, according to Ray. Landlords also will directly challenge the accuracy of their assessments.

The potential financial impact of widespread CRE tax challenges could be significant because the largest taxpayer in any town or city is often the owner of commercial property like an office building, an industrial building or a mall.

Local governments are dependent on property taxes to pay for everything from schools to trash collection and would have to make up any shortfalls from big property owners with increases that would affect citizens and small businesses.

"The worst-case scenario is that towns could be faced with an increasing number of tax appeals based on inflated valuations and the market doesn't support those valuations," said Daniel Pollak, another Brach Eichler attorney.

Data from the Urban Institute from 2016, the latest available, show that state and local governments collected a combined $503B, or roughly 16% of their general revenue, from property taxes. That is higher than sales, personal income taxes and corporate income taxes. As the economy contracts, governments likely are going to hit up their biggest taxpayers for more money. 

"Our clients are significantly concerned that shortfalls in state and municipal budgets will drive tax rates higher," David Wolfe, a partner with Skoloff & Wolfe of Livingston, New Jersey, said in an email. "This is a particular problem when tenants are not paying rent, and they are being asked to forgive those non-payments." 

President Donald Trump and his Republican allies in Congress last week rejected pleas from governors for a $500B financial lifeline, arguing that taxpayers shouldn't bail out "poorly run" states led by Democrats such as New York.

In response, New York Gov. Andrew Cuomo noted residents of the Empire State give the federal government more money than they get from it.

CORRECTION, MAY 6, 9:42 A.M. ET: An earlier version of this story misspelled Brach Eichler. It has been corrected.