Want Commercial Property Tax Relief? Don't Hold Your Breath

Economic slumps traditionally set off battles between local governments trying to make up lost revenue by holding the line on property taxes and property owners trying to cut their taxes to be more in line with their diminished bottom lines.

For many commercial property owners, the pandemic-inspired recession has set that dynamic in play once again but with some new twists. For one thing, not all owners have had a hard time, such as most industrial owners. More importantly, tax experts say the prospect of a relatively short downturn might give taxing authorities the upper hand.

"We've yet to identify a systemic sell-off at fire-sale prices for commercial properties," Moody's Analytics Head of Commercial Real Estate Economics Victor Calanog said. "With the exception of sectors like hotel and retail, which have been hit hard, few distressed deals have really made it to market. Cap rates have stayed mostly flat and in some markets have even trended downwards."

So while there is distress on the income side as tenants struggle to pay rent, fewer owners and operators appear desperate to sell at discounted prices, Calanog notes. Owners will likely file appeals anyway, given widespread acknowledgment of economic difficulty all around — but tax authorities will also have a case to make about property prices not really budging much over the current cycle, he said.

Commercial property owners will counter that by saying that elevated taxes have been part of the pandemic-era crunch for owners, especially in the retail and hospitality sectors, according to Marc Wieder, Anchin, Block & Anchin Real Estate Group co-leader.

"Even though they were caught in a year where they're suffering from poor or nonexistent revenues, they were paying real estate taxes as if it were a year earlier," Wieder said.

For owners who managed to keep current with their mortgages, that might not have been an immediate crisis, since banks often escrow their taxes. Still, the fact that they received little or nothing in the way of relief points to the wider fact that landlords have mostly gotten the short end of the stick.

"Landlords have gotten no assistance from the federal government," Wieder said. "They were ineligible for PPP loans, and while residential tenants had eviction moratoriums, there was no relief for landlords."

Landlords are thus turning to the appeals process for a bit of relief, Wieder said, including in New York, where he is active. 

"Attorneys who specialize in that area have been inundated this year with owners who have never applied in the past but who are applying now," Wieder said. "Even though some properties have gotten reductions in their assessments, it may not be enough in light of what's going on."

Pittsburgh-based Meyer, Unkovic & Scott partner Jason Yarbrough, who represents commercial property owners throughout Pennsylvania, said that he is also seeing an increase in appeals as large commercial property owners are looking at both the short- and long-term impact of Covid-19.

Some owners believe they will continue to feel the pain of a long recovery period, and they are more inclined to file, Yarbrough said, especially — and unsurprisingly — those in retail and hospitality. Others who experienced more short-term pain, such as office owners, might be more circumspect about their appeals, especially if they went into the coronavirus pandemic in a relatively good position in terms of their assessment.

"They're mindful about putting their assessed value at issue, and they don't want to do something in the short term that could be harmful for them in the long term," Yarbrough said.

Some jurisdictions are indeed expecting assessments to go up for both residential and commercial properties despite the pandemic.

In Scott County, Iowa, which includes metro Davenport and is the third-most-populous county in the state, assessor Tom McManus told NPR that there has been an average increase for commercial property valuation of 6.5% in 2020, because prices didn't decline on average during the pandemic but rather kept rising.

"We take all the sales that have already occurred and use that information to set current assessed values, so we trail the market," McManus said. "When we set the January 2021 assessed values, we're basing it on the 2020 sales that have already occurred."

By contrast, some localities are being proactive when it comes to property tax relief for owners affected by the pandemic. In Santa Clara County, California, for instance, Assessor Larry Stone asked commercial property owners to notify his office if the market value of their property dropped below the assessed value, as of Jan. 1, 2021.

“Hundreds of owners requested reductions, and our appraisers are evaluating each request," Stone said. "We plan to review as many of the requests as possible by June, when property owners receive the annual assessed value notification."

There may very well be a wave of tax appeals, but many taxing jurisdictions have already proactively lowered assessments to reflect declining valuations, according to SitusAMC Managing Director, Real Estate Valuation Services Andrew Sabatini.

"Still, we don't anticipate this translating into lower tax liabilities for property owners, due to the prospect of rising tax rates," Sabatini said. "In fact, that allows taxing entities to effectively offset the pandemic-related impact of lower assessments while potentially curbing the volume of tax appeals."

That way, he said, municipalities can protect much-needed tax revenue, since property owners can appeal an assessment, but not the tax rate itself.

"An example of this is in New York City, where assessments have already declined quite significantly," Sabatini said. "However, market participants generally anticipate the tax rate will increase when released later this year. We've seen this play out in prior cyclical downturns, and while the current pandemic is unlike any downturn in modern history, we can draw inferences from those other events."

Adding to the mix is the political pressure to reduce residential property taxes in some places — often at the expense of commercial owners, who see their bills go up. There is also an increasing awareness of the disparity in property taxation by race and class.

"Using data from millions of residential real estate transactions, this paper shows that assessments are typically regressive, with low-priced properties being assessed at a higher value, relative to their actual sale price, than are high-priced properties," Christopher Berry of the University of Chicago Harris School of Public Policy writes in a 2021 paper, Reassessing the Property Tax.

Also, Berry found, the higher the Black population in a given census tract, the higher assessments tend to be, compared with local averages.

Sometimes local political considerations will trump any impact of the pandemic on property taxes, with Cook County, Illinois, being a notable example of that, said Siegel & Callahan attorney Jerry Brown, a real estate specialist based in Chicago.

Even though residential housing had a good year in 2020 on average in terms of valuation, there is still mounting pressure to reduce residential property taxes, Brown said.

"In Cook County, we've had a new assessor since 2018, and one of the themes he ran on is that under the previous administration, commercial properties were consistently under-assessed at the expense of single-family homeowners," Brown said.

Looking at the first two assessment cycles under the new administration, the pattern has been modest reductions of assessments for single-family homes and a pattern of significant increases in the assessments for commercial property, Brown said.

Of course, the process is more complicated than what the assessor does, with many unhappy commercial owners now going to the Cook County Board of Review, which handles appeals. Brown said he expects many more to appeal to that body.

"For owners who are challenging the initial assessments, there hasn't been a lot of significant reductions for commercial properties from the assessor," Brown said. "So we're going to see a fairly large number of appeals done at the Board of Review.

"Not only that, 2021 is the reassessment year for everything in Chicago," Brown said. "So that's a huge number of commercial properties up for reassessment, and I expect a very large share of them challenging the number they get from the assessor."