A lack of comparable sales for commerical properties is one factor making tax assessments more difficult
The struggling commercial market has injected a further wave of uncertainty into a frequently thorny issue: property taxes.
A report this week noted the increasing number of residential property tax appeals, as more and more homeowners seek to challenge the county’s assessments of their properties.
But high unemployment, rising vacancy and a low number of sales has made calculating tax assessments for commercial and industrial buildings harder than ever before. And in a slow-moving market, the murky assessment valuation and increasing taxes are proving to be another stumbling block for the market.
“There is a lot of uncertainty [in the commercial market],” said property appraiser Britt Rosen of Brittex. “Are assessments being lowered commensurate with the decline in values? I’m not so sure they are.”
There are three criteria for property appraisers to examine when calculating the assessed value of a property: cost, comparable sales and the “income” approach, which looks at a number of factors influencing the income stream generated by a property.
But as struggling local governments look for funding, even if valuations are accurate and unchallenged by owners, they may face the same taxes as the year before, and that is because of millage rates.
While the county comes up with property value assessments, it is municipal governments that establish so-called millage rates, which are the dollar amounts for every $1,000 of assessed value on a property that go toward the property tax payment.
For example, according to data collected by the Miami-Dade Property Appraiser’s website, the proposed 2010 millage rate for Coral Gables is 6.1890. Adding in countywide millage and other fees, this number jumps to 21.81. That means that for a $1 million small office building, the total tax hit would be around $21,810.
And Miami-Dade’s municipal governments have proposed a nearly across-the-board millage hike for 2010, according to analysis by The Real Deal looking at the rates from 2009.
“The county has to come up with assessment levels, and if people don’t object to them, obviously they’re satisfied with the assessment fees,” said Tom Dixon of Dixon Commercial Real Estate. “The second part of that equation is the millage rate, which is established by the municipal governments. So even though the assessments could go down by 10 percent, they could raise the millage rate by 10 percent.”
Of the 35 millage rates proposed by Miami-Dade County for the 2010 tax year, 25 municipalities increased their millage rates, and 10 kept them the same. The 25 municipalities that increased their rates did so by an average of 13 percent.
Rosen, who has also worked in performing property tax appeals, said the problem with value assessments is that the number of comparable sales is so low due to the downturn. It is further compounded by the fact that many distressed properties, even if they are listed by a broker and sit on the market for days or weeks, do not get qualified by the county as comparable sales.
The sheer number of commercial properties means the more time-intensive income approach may become impracticable.
“There’s no one behind the driving wheel,” he said. “[The county] is doing it en masse. Can they look at the income approach for each property?”
The income approach is also complicated by changing rents and concessions.
“I think for the years of 2009 and 2010, greater emphasis is placed on the income approach to value because of the lack of sales comparables,” Dixon said. “But there is the same problem there; it’s difficult to get rental [information] because a lot of landlords have lowered the rent to keep their tenants, so the property may have been rented through the year 2009, but then halfway through 2010, the landlord had to lower the rent, or the tenant said, ‘I can’t pay and I’m leaving.'”
Ed Redlich, vice president of ComReal Miami, a commercial real estate brokerage in Miami, said the commercial property tax situation is on the mind of would-be buyers.
“Every customer of mine now asks me about property taxes, because it’s just one of the many operating expenses they have to pay — one of the largest ones,” he said. “We get that all the time. Here we are in a recession and trying to find a way to work ourselves out of it and taxes just keep going up. And if we are successful and reduce the assessments on commercial properties, then they just raise the millage rates.”
While it’s on the mind of purchasers, though, the tax situation is not proving to be a further deterrent to deals.
“I haven’t seen any deals affected by it,” said Jason Sundook, principal and vice president at commercial real estate brokerage NAI Merin Hunter Codman.
Sundook also said that potential tax problems were balanced out by lower operating expenses coming from lower gross rents and concessions.