When an altered traffic route handicaps your retail center, it's time for an assessment appeal.
Once motorists lose sight of the property or can no longer access it conveniently, customers stop coming. At the very least, an owner facing such a loss is entitled to a fair property tax bill that reflects the asset's diminished commercial value.
Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property. Don't wait for evidence of changing traffic counts. The damage to property value occurs when the public announcement of the traffic diversion is made.
Effect on value
Assessed values are based upon market value, and market value in turn is predicated on a willing buyer and a willing seller. A public announcement that traffic will be rerouted for a period of time is an external event that appraisers refer to as external obsolescence, or something beyond the perimeter of the property that has an impact upon the property's value. Altered traffic routes are something a prudent buyer would consider in determining what to pay for an asset.
The announcement of an impending traffic shift will affect properties in varying time sequences and severity. For instance, the economic lifespan of a highway commercial property such as a convenience store will be limited to the opening date of the new roadway. A prudent buyer will base the purchase price upon the net operating income for that economic life.
There could very well be some residual value after the opening of the new road, but certainly not for convenience-store purposes. The carcasses of functionally obsolete convenience stores can be viewed from any recently moved interstate highway in America.
Calculating the loss
Determining the property value after a road realignment plan is announced requires the stabilization of the declining income over the predictable remaining life of the property.
Consider, for example, a strip retail center. After the announcement but before, there may be no observable effect on retail sales at the center. However, from the time that the yellow barrels go up and the construction starts, and through the opening of the new road, sales and tenancy will decline.
Assuming the center is functioning at 95% of its gross potential at the time of the announcement, there may be a slight drop-off in the first and second year. But assuming a three-year building period for the roadway, leases that expire are not likely to be renewed. Leases in place also are in danger because patronage is expected to decline subsequent to the road opening.
The tenant will lack the ability to make the rental payments and may walk away. As spaces within the center go dark, the property will lose its synergy of crossover customers. At the end of a 10-year period after the announcement, the center will be either dark or attract only an inferior class of tenant, and will at best be a marginal performer.
The property owner must analyze this declining income stream to determine a stabilized income over the remaining economic life of the property. The capitalization rate is then applied to the stabilized income over the property's remaining life as opposed to using the historic, which becomes meaningless in the face of the changing traffic pattern.
It is critical to remember that the property owner's loss of value occurs at the time the road relocation project is made public, not at some future date. Thus, delaying a tax assessment appeal will only add to the property owner's losses.
Jerome Wallach is a partner in St. Louis-based The Wallach Law Firm, the Missouri member of the American Property Tax Counsel.