It turns out Woody Allen was wrong about death and taxes — property taxes at least. Property tax assessments aren't certain. They can be changed. And that could mean big savings for retail real estate owners.
Assessors determine tax bills by setting property values based for the most part on incomes. They also use sale price on recent comparable properties and may incorporate an estimate of replacement cost.
But that doesn't have to be the end of the story.
As with other taxes, there are ways to reduce payments, which can mean significant savings. Property-tax costs comprise about 20 percent of all operating expenses for enclosed U.S. malls and one-third of operating expenses for open-air centers, says the International Council of Shopping Centers.
Retail property owners (and their lawyers and accountants) say that the key is not viewing the relationship with assessors as being adversarial. Make friends with tax assessors. Explain things clearly. Be nice. Desk pounding doesn't lower assessments. Good information does.
The important thing to remember is that assessors are public servants trying to do a job. With cities and states strapped for cash, property taxes are an obvious area to try and increase tax revenues. (In 2002 for example, New York City officials jacked up property taxes 25 percent.)
“Nobody likes us,” says Wayne Trout, who retired this year as assessor in Norfolk, Va., and continues to serve as president of the International Association of Assessing Officers in Kansas City, Mo. “But we're not bad people. Our goal is equitable distribution of tax burdens within the confines of what the law requires.”
Adds Barbara Perry, assessor for New London, Conn.: “All we're trying to do is to place an accurate value on property.”
In most states, property owners have a small window — a few weeks — to work with assessors between the time they make their valuation and the day it is finalized.
A key is to be prepared ahead of time — to look through your own numbers, check trends in the market and be prepared to make a case for why the assessment may be too high.
“Begin early and monitor things on an ongoing basis,” suggests Mark Parish, real estate tax director for mall owner Taubman Co. of Bloomfield Hills, Mich.
“We find it's much more productive towith issues early on an information basis,” Parish contends. “rather than waiting until it becomes confrontational or a litigation situation.”
It comes down to a key change in the usual mindset: Most of the time, owners talk about how great their properties are. But tax time means outlining the flaws.
“We want to paint the property in the most unflattering realistic light,” says Jim Popp, an Austin, Texas-based tax attorney. “A couple dollars per square foot can make a significant difference.”
If a property is underperforming relative to other regional malls, explain that. A regional or super-regional mall may be the only such property that an assessor knows. It may not occur to the assessor that the local mall is a dog compared to the one a couple of counties over.
Even after the deadline, owners have recourse in getting assessments changed. They can take their case to a review board and then on to court. Litigation is a last resort, of course. “Very expensive,” says Taubman's Parish — both in money and time.
But tax bills can be cut without going to court. Compare the assessment with an assessor's prevailing ratios between market value and assessed value, advises J. Kieran Jennings, a Cleveland attorney who works with mall owners. In some states, that ratio is fixed. In others, it changes annually. “What you look for is not whether the assessment has changed much,” says Jennings, “but whether that assessment is still fair.”
The assessor will use existing leases to generate an income figure in deriving an assessed value. Have market rents fallen since leases got signed? A judge may decide that that assessed value should reflect a combination of existing leases and market rents.
Even in states with property-tax caps, it's important to watch assessments, says Howard Klein, vice president for real estate taxes with Macerich Co. in Santa Monica, Calif.
caps annual increases at 2 percent over a property's base year — when it was last assessed or upon completion of construction. Thereafter, assessed value rises at the annual statewide inflation rate up to a maximum of 2 percent.
If a property is scheduled for redevelopment and underperforming and the value rises 2 percent anyway, an owner should go see the assessor, says Klein.
Even sophisticated tax departments may miss some wrinkles, such as the effects of retenanting or a shift to gross leases. For example, if five shops paying $25 per square foot get replaced with a single Old Navy store paying $12.50 per square foot, the big new tenant looks pretty spiffy to the assessor — but it generates only half as much rent. The assessor needs to know that.
For many landlords, such retenanting is defensive and therefore shouldn't lead to a higher assessment. “It's maintaining what you have — stopping an erosion — not creating an increment of value,” says Kenneth Rogers, director of real estate analysis at the law firm Fisk, Kart, Katz & Regan in Chicago. “The center looks nicer, but you're not boosting your net operating income.”
Rogers won a 17 percent cut in a 2003 assessment for a Wisconsin mall that had remodeled to include Staples and Gap stores — moves to reposition the property against a competitor 20 miles away.
In the same vein, assessors' models may assume properties use net lease structures — in which tenants pay for taxes, insurance and common area maintenance. But if tenants have a gross lease — in which the owner pays those extras — an assessor may overestimate income. It's important to clarify that so the assessors' models are correct.
But owners using net lease structures need to be wary of assessments, even if they aren't bearing the brunt of the cost. Because the tax gets included in rent, letting assessments balloon means rents could be rising faster than the rest of the market. “If your property is paying more taxes than a competitor it puts your leasing people at a disadvantage,” warns Popp.
Assessments can also spike when properties change hands. Sale prices are an obvious guide for the value of property.
But property sale prices may include value beyond the worth of the real estate. Assessors won't make that adjustment unless you spell it out for them, says Jennings. At the time of a sale an acquiring company should break out real estate value from other items. Non-real estate items might include above-market leases such as often occur in sale-leasebacks, creditworthiness of tenants and build-to-suit improvements financed through the lease. Spell out those items in a purchase agreement that documents “the number that you are happy with,” says Jennings, “that you believe is the true value of the real estate.”
An independent study of regional and national capitalization rates for retail properties is also a useful tool. Such studies cost from $2,500 to $15,000, says Parish. Having such a document on file helps the assessor fend off politicians who want to milk the mall. Such a study shows where a property fits income-wise in the framework of other similar properties regionally and nationally — and can buttress an owner's argument for a lower assessment.
To a great extent, working on property assessment is about building a relationship with the assessors. For example, recent retiree Trout wanted to see the owner or an employee of the owner. He was wary of lawyers and other representatives. “You have to have the question in your mind,” says Trout. “All they're concerned about is their fee based on how much you the assessment is lowered.”
That kind of talk makes tax pros bristle. Consultant Rogers says his firm may bill a fixed fee, by the hour or may collect a contingency fee based on tax savings. Whatever the arrangement, “the keys to a successful appeal are establishing credibility with the assessing authorities and proving your case,” says Rogers.