Real estate investors looking to property taxes for savings

In the second quarter of 2020, the U.S. office market recorded 14 million square feet of occupancy losses — the steepest drop since the second quarter of 2009, according to JLL Research. Because of that, their property taxes could be lower than their current assessment.

However, the effects haven’t filtered through just yet. Tax assessment dates run January to January, so most investors will make adjustments for the pandemic next year.

“I think you’re going to see the real impact of the pandemic on property taxes heading into 2021,” says Debbie Moore, Senior Vice President with JLL Valuation Advisory. “It really depends on the jurisdiction of where the property is located, and how each assessing jurisdiction applies the effects of COVID-19 on future assessments.”

For example, New York City has proposed new legislation to give 10 years’ worth of property tax breaks to landlords who are willing to renegotiate lease terms to help their struggling business tenants.

Determining a fair assessment

Property taxes are in part based on a property's current assessed value. For office buildings, they’d review the year end income statement, then apply it to an income analysis to determine if the valuation is fair, states Moore. And retail properties can be reviewed using both market rents and actual rents if available. Should an asset’s value fall, taxes owed on it will be lower as well. However, even if an assessment decreases from one year to the next, it doesn’t necessarily mean that taxes will decrease, they may increase or remain the same.

“Typically, tax forecasts are based on what’s known in the market and what a hotel’s performance trend is,” says Calverley. “If they know they’re going to perform better in year two, three, four and five, generally it’s assumed that taxes will increase incrementally with revenues.”

Therefore, one place companies have started assessing valuations is through nearby assets.

“As a hotel owner, you might be able to draw some comparisons to other hotels in your area if you feel like you might be overpaying or that there’s an error,” says Calverley. The same would apply for office or retail properties.

A challenge for investors is working within the systems of different jurisdictions. Timing can also be an issue, since some jurisdictions assess properties every year, others every two years and some, every five years.

A property tax representative can contact the assessor’s office to find out how the property has been valued if there appears to be a discrepancy.

“By tracking assessments and assessment appeal deadlines, we can determine by review if an appeal is warranted.”says Moore.

Lawsuits on the horizon?

Not all landlords are looking at their property taxes at the moment.

“If performance year over year has dropped — and every hotel is experiencing that right now — and they’re not looking at their current property tax assessment, they’re assuming they’re being treated fairly,” says Calverley. “But that may not be the case. Even before the pandemic, we found that a majority of our hotel clients weren’t being assessed properly.”

Current hotel demand statistics support that theory. According to travel data company STR and consultant Tourism Economics, average U.S. hotel occupancy is expected to be just 40% this year and hotel demand likely won’t see a full recovery until 2023.

In a best-case scenario, an agreement can be made with the assessor and the case settled. The JLL Hotels & Hospitality Group settled a longstanding property tax appeal case for Loews Orlando Resorts in Florida. “It was determined that they were being unfairly taxed on non-real-estate assets,” says Calverley. “Loews was able to save nearly $10 million as a result of that appeal.”

If an appeal doesn’t work, it may get escalated to another level including a board hearing, and, if worse comes to worse, a lawsuit. Calverley notes that there are some jurisdictions where filing a suit is necessary to get the best outcome.

“Owners should review their property taxes once they receive their 2021 assessment notices and be aware of appeal. deadlines,” says Moore “Otherwise, they might be missing out on considerable savings and the opportunity to file an appeal if there are specific issues caused by the pandemic related to their property.”

“Owners should review their tax year 2021 assessment notices once received and be aware of the appeal deadline, otherwise they might miss an opportunity to file an appeal if there are specific issues to their property caused by the pandemic.”