VOL. 119 | NO. 8 | Wednesday, January 12, 2005
Businesses Deal with Property Reappraisals
Business Owners Brace for Reappraisal
Higher appraisals mean higher taxes for commercial tenants
The Daily News
Among the estimated 300,000 parcels of property examined for
the upcoming Shelby County property reappraisal, about 20,000 are commercial
properties, ranging from car washes to office buildings.
Commercial and residential property owners will begin
receiving reappraisal notices next month for the process that is required by
law in Tennessee to equalize the tax burden.
Setting the tax rate. A
misconception exists that an increased property value means the county brings in
more money. But according to Tennessee law, the tax rate is adjusted to a level
that brings in the same amount of property tax revenue generated before the
reappraisal, so the process should not result in a windfall for the county. And
property owners by law are protected from paying more than what is determined
to be their fair share.
If there is an increase in (overall) property value at a
reappraisal, the county is required to lower the tax rate, said Shelby County
Assessor of Property Rita Clark. But that doesnt stop them from turning
around and raising it afterward.
Absorbing costs. Once
a propertys appraised value is determined, its assessed value the percentage
of appraised value on which property taxes are paid can be calculated. In
Tennessee, commercial property is assessed at 40 percent of appraised value.
When a commercial property is hit with a higher appraised
value, the lease generally determines who pays those extra taxes. But in pretty
much every case, its the tenant who absorbs the added cost.
Without question, every tenant in the market pays taxes,
said Michael Mullis, vice president and partner at Farnsworth Investment Co.,
which manages industrial properties.
But when a property is vacant, its owners are not too happy
when a higher valuation arrives in the mail.
In our business, taxes are passed through expense, so the
tenant pays the taxes assuming there is a tenant in
the building, said Tommy Farnsworth III, president of Farnsworth Investment Co.
If its a vacant building and therefore there is no tenant, then obviously the
owner of the building is responsible for the taxes.
Assigning value. The
process for determining reappraised value of a commercial property differs from
residential property, for which sales history is examined. Sales, income and
cost comparisons are used to determine a commercial propertys value.
The most common way to determine value of income-producing
parcels in Shelby County is the income capitalization approach. This process looks
at estimated market vacancy and credit loss and subtracts all of the propertys
estimated net operating income, or NOI. A capitalization rate is used to
convert the NOI into a value.
Commercial property of, say, Clark Tower you dont have a
lot of Clark Towers and you dont have a lot of sales for them, said Patrick
Lafferty, director of the Assessors Answer Center and appraisal services.
Unlike residential property where there are a multitude of sales the sales
approach in commercial would not be as prominent.
Economic impact. When
commercial property owners open their reappraisal notices, some will find
higher values. But for many others, the economic slowdown that followed the
2001 reappraisal will have had an effect on property income resulting in lowered
or static property values.
I might argue that some of these buildings are maxed out, Farnsworth
said. I dont think theres a lot of room to go up.
When values do increase, it can have a domino effect,
because tenants might refuse to renew leases at a higher rental rate.
Its cyclical, Farnsworth said. If you raise taxes too
much, tenants balk at occupancy costs and say, Look, I cant pay that number, so
Ill pay the increased taxes but Im going to lower my rental payments to you.
It becomes a vicious cycle. If your rent goes down, your value goes down, because
the appraiser is looking at it from an income approach.
Option to appeal. Property
owners have the right to appeal reappraised values. Many commercial owners do
so, but they dont always see the process through.
Nearly a third of our commercial appeals are withdrawn
prior to them going in for their actual hearing, Lafferty said. So while
there does seem to be a large number of appeals filed, the ones actually heard
is much less.
But many property owners, including Farnsworth, see the
option as valuable.
(Clark) and her staff have been very forthcoming about what
their goals and ideas are, Farnsworth said. I have a tax consultant that
represents us in our appeals should we appeal them. Theyll miss something or
well think something is valued too high and well want to discuss it with
them. Theyre pretty good to work with.
When you have as many properties as we or other landlords
like we do have, youre going to dispute some values. And thats what the
appeals process is about.
Impacting value. Scott
Barton, vice president of retail services at CB Richard Ellis, said appeals
arent common among retail property owners because properties tend to be
Lately with cap rates so low, the true value would be
higher than what is on the tax rolls in most cases, he said. I think its
more common on the residential side to appeal and get it reduced.
Unfortunately, for property owners in declining areas,
parcels are more likely to be overvalued, since actual value might have
declined since the last sale of the property. Some shopping centers in Hickory
Hill, for example, have lost tenants over the years, dropping in actual value,
despite the centers status as prime properties.
Like Hickory Ridge Commons, for example, Barton said. When
developed, it was appraised for X number of dollars, and over the course of the
years, things happen. Tenants went bankrupt and the property is no longer worth
as much. Clearly, in that situation, the property owner could appeal, and
theyre usually successful.