» Subscribe Today!
More of what you want to know.
The Daily News

Forgot your password?
TDN Services
Research millions of people and properties [+]
Monitor any person, property or company [+]

Skip Navigation LinksHome >
VOL. 119 | NO. 8 | Wednesday, January 12, 2005

Print | Front Page | Email this story | Comments ()
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 undervalued.

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.


MORTGAGES 0 79 1,199
BUILDING PERMITS 146 146 2,571