Taxing times

State and local governments are struggling to collect property tax revenues — but many owners just can’t pay

With property tax deadlines quickly approaching or having already passed many state and local governments are in a bind.

Taxes from real estate bring in huge chunks of revenue to cover essential services for municipalities, which are at a high need during the pandemic. And without that money, some cities may have to float bonds or file for bankruptcy. A small share of the property taxes are designated to state services, which poses an additional problem at the state level.

At the same time, many residents are still cooped up at home, and commercial real estate owners are now grappling with red ink, as stores, restaurants, gyms and other retailers increasingly fail to pay rent. For multifamily landlords, unemployed tenants present a similar problem. And for some hotels and tourism companies, the situation’s even worse.

Counties around the U.S. have proposed a variety of different solutions — from delaying tax payments to completely reassessing property values — but the money will have to come from somewhere to continue funding essential services.

And while many have compared the coronavirus to Sept. 11, 2001, and the 2008 financial crisis, a growing number of experts believe the impacts on real estate could be far worse. Some say the hardest hit companies may not survive, especially those without corporate backing.

“Do they ever come back, or is this the end of that era?” said Julio Gonzalez, founder and CEO of tax engineering firm Engineered Tax Services. “The whole landscape is changing.”

Weighing the Big Apple

There’s no doubt New York City has been hit the hardest by Covid-19.

To help homeowners, the city is offering some payment plans and deferral programs for property taxes. But the first half of property tax payments are still due on July 1.

For the 2019 tax cycle, New York City billed $30 billion in property taxes, according to tax experts in the area.

Under current tax laws, all payments must be made on time, and those who miss the deadline are charged 18 percent interest compounded daily. Hotels, theaters and shopping centers — which have been especially hard hit — are still expected to pay on time despite having no active income for the last several months.

“Not only are my clients crying out for cancellation or postponement, they need an announcement now so that they can use these anticipated tax funds to pay for salaries, maintenance and operations,” said Joel Marcus, a partner at the NewYork-based real estate tax and litigation law firm Marcus & Pollack.

Surveying the Sunshine State

Florida is not going to see the real effects of the coronavirus until the next tax cycle due to the “lien date.” This is a date set by the state to assess property values. Next year’s lien date is Jan. 1, 2021. In addition, many Florida property owners already paid this year’s taxes because the state gives taxpayers a 4 percent discount if they pay in November when the bills arrive.

But Logan Gans, a partner at the law firm Shutts & Bowen in Miami, said that he anticipates the next tax cycle to be much more difficult — especially for the decimated tourism industry.

Florida property tax rates are based on two components: the property value set on Jan. 1, 2020, and the millage rate, which is the amount a property owner has to pay in taxes for every $1,000 of their property’s assessed value.

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Miami proper billed about $2 billion in property tax revenue in 2019, and of that amount, $445 million is put toward city services, according to tax experts in the area.

Not only were properties valued before the coronavirus hit, but many counties are overstressed with the pandemic and need more money to pay for essential services, which will affect the millage rate, according to Gans.

“If the federal government isn’t going to help the state and local governments out, then the counties are going to have to raise revenues themselves or else go into bankruptcy,” he said.

The City of Deferred Dreams

In Los Angeles County, annual property tax bills are paid in two installments — the first was due in December and the second was due this April. Both deadlines had a 10 percent interest rate attached to delinquent payments.

Gov. Gavin Newsom announced an executive order to waive late payment penalties on property taxes if the taxpayer can prove a correlation between coronavirus and ability to pay. But it appears this relief is not available to taxpayers who were in default on certain property taxes prior to March 2020, said Kevin Moore, of the local law firm Kevin J. Moore & Associates.

For the 2019 tax cycle, Los Angeles County billed about $2 billion in property taxes, according to tax experts in the area.

Moore said that multifamily properties have been hit the hardest. “Banks are not lending or refinancing on these types of property for fear that tenants will not be paying rent and the owner cannot evict,” he noted.

Michael Lebeau, an attorney at Bewley Lassleben & Miller, said the state’s tax codes include a provision that could potentially provide property tax relief for regions that have experienced a natural disaster. But California courts have held that it only applies if the governor declares a disaster and there is physical damage as well as restricted access to property.

In the era of coronavirus, it’s unclear whether this disaster relief will apply to the current circumstances.

Windy City Headwinds

Chicago is taking a different approach in trying to remedy the issue of property taxes during the pandemic. On April 3, Cook County Assessor Fritz Kaegi said he would reassess the entire county from top to bottom. That’s roughly 1.8 million parcels of land.

“How he’s going to do that is a mystery to all of us,” said George Relias, founder of Chicago-based law firm Relias Law Group. “The speculation is that he’s going to have to use some kind of mass appraisal methodology, like a percentage across the board to reduce assessments.”

Relias said if this is the approach Kaegi takes to reduce property values, it will not end up saving taxpayers money. He said the tax rate will increase to compensate for the reduced values.

About $6.7 billion in taxes were billed for the 2018 cycle, of which about $1.5 billion goes to city services, according to local tax experts.

Meanwhile, some retail landlords are offering relief to tenants by extending their leases to allow time for the tenant to pay back what is owed.

Along with retail, Relias said office space is “going to be crushed” in the long run, which may result in adaptive reuses of buildings