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VOL. 123 | NO. 147 | Tuesday, July 29, 2008

Property Values Shrink Downtown

By Andy Meek

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The housing market is continuing to leave its fingerprints on already-stretched balance sheets in the Tennessee statehouse as well as on those of municipal agencies and government boards closer to home in Memphis.

One way it’s doing so is through real estate-related taxes, collections of which have dropped off to varying degrees as the credit crunch and changes in the real estate market squeeze homeowners, lenders and real estate brokers. Public agencies are feeling the pinch too.

At the Center City Commission’s board of directors meeting Friday, for example, Chief Financial Officer Jim Street provided a current look at the group’s financials to board members. He said the budget tentatively is in the red and blamed a larger than expected number of successful property value appeals by Downtown commercial real estate owners as one of the reasons.

All commercial property in Downtown’s Central Business Improvement District (CBID) is assessed a special fee by the CCC, the group that manages and promotes development in Downtown Memphis. That fee is equal to 65 cents per $100 of assessed value. The fee is not paid by owners of residential or tax-exempt properties Downtown.

Smaller cushion

Each year, a cushion is built into the CCC’s budget to account for any reductions in property value that come later as a result of Downtown commercial real estate owners successfully appealing their assessments. The cushion is necessary because those appeals lop some value off the tax rolls.

This year, the change was larger than expected. The CCC’s reserve fund for CBID appeals is down more than $100,000 from its level at this time last year after refunds of CBID fees were given to the property owners who won their appeals.

“The CBID assessment has not come in at the level we budgeted, primarily due to appeals for assessment values since the last (countywide) reappraisal, which was done in 2005,” Street told board members. “We do have a reserve for that, and I have applied part of that reserve to this year’s income statement to offset the reduction we have experienced.”

Revenue from the CBID fee is used to provide everything from business recruitment to public improvements in Downtown. CCC president Jeff Sanford said the group only can make its best guess about the level at which the CBID fee revenue will come in during a given year.

The big variable is how much value will come off the tax rolls – thus shrinking the CBID fee collections – after Downtown property owners appeal their assessments.

“We missed our mark in estimating CBID assessment fee collections,” Sanford said last week. “It is always a guess based on appeals of appraisals and the outcome of that cycle. We missed it by about 5 percent this time. Missing it at all is not something that we shoot for.”

Budget shortfalls

The situation is nothing close to a crisis – or even a serious problem at the moment – for the CCC. But it does demonstrate the kinds of ties that bind the public sector to swings in the housing market.

Compared to multi-billion-dollar agencies such as the city of Memphis or Shelby County government, the CCC’s revenue hiccup might seem minor in comparison. Both city and county governments, on the other hand, get the lion’s share of their operating money from property taxes.

Homeowners in those areas, in turn, send a chunk of real estate taxes to the state of Tennessee, which is dealing with its own budget shortfall. Housing market activity in Shelby County is one reason for that shortfall.

To understand why, the amount of realty transfer and mortgage taxes collected by the state from Shelby County offers an example. In June, the amount of those fees collected by the state from Shelby County totaled about $1.64 million, which was almost a 50 percent drop from the amount the state collected from the county in June 2007.

The state collected about $3.2 million in realty transfer and mortgage taxes from Shelby County during that month, according to the latest figures from the Tennessee Department of Revenue.

The 12-month period ending in June 2008 shows a similarly large decline. During that time, the state’s haul in realty transfer and mortgage taxes from Shelby County was a little more than $25 million. But in the 12-month period ending in June 2007, the state took in almost $35 million in those fees.

PROPERTY SALES 85 205 21,165
MORTGAGES 76 206 24,338
BUILDING PERMITS 183 321 43,755
BANKRUPTCIES 48 92 13,560