As developers reduce every possible expense in a tight market, what are overlooked ways to improve their competitive position? Tax attorney Ben Blair, a partner at Faegre Drinker Biddle & Reath LLP, said that while you may not be able to move the building to a better location or put an intensive capital investment into improvements, you can work to lower your tax bill.
During a CRE.Converge conference presentation on property tax mitigation, Blair shared tips for making your case for property tax mitigation.
Any assessment that is based on pre-pandemic data is ripe for challenge. Assessment data is inherently backward-looking while values for income-producing properties are (and should be) forward-looking. Many municipalities are assigning higher values for properties today than pre-pandemic, which Blair said is not reflective of the economic reality.
Absent litigation, you can have conversations with assessors to make certain assessments are a fair representation. Assessors only want hard data when you’re asking for a tax reduction, but how you look at that data is important. In the early stages of a challenging economy, it’s not uncommon for rent rolls to tell one story while reality tells another, especially if those rents wouldn’t be achievable if the property were to hit the market today.
Don’t just look at occupancy rates. When are those leases due and what will happen when the leases are renegotiated? Relying on pre-2020 leases may not be a good indicator of current or future leasing potential. Look at the leases that have come up in the last four years and the rents you have been able to achieve with those renegotiations. Those recent leases are far better indications of competitiveness in the market.
Don’t conflate nominal rent with effective rent. The rent amounts need to reflect the cost of getting tenants to sign on. The value of tenant improvement allowances, months of free rent and other concessions should be removed from contract rents.
Don’t ignore floor plates. Floor plans designed for institutional tenants or dated preferences can impact tenant attraction and retention. Offices with big, showy open spaces that are hard to subdivide may be harder to lease. And don’t treat all floors the same. Assessors like to use broad strokes but applying one uniform rent for all tenant spaces can ignore the market realities of some floors being more or less valuable.
Relying on regional sales data for comparison can be unfair. If only trophy assets are selling, what is the realistic expectation that elevated values are applicable across the board? Anytime you have something that was hot go cold, there’s an opportunity for disconnect.
This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s CRE.Converge 2024. Learn more about JLL at www.us.jll.com or www.jll.ca.
