VOL. 128 | NO. 53 | Monday, March 18, 2013
EMPHASIS Commercial Real Estate
Reappraisal to Impact Office Market
By Sarah Baker
For the first time in history, the property value of the once-every-four-year reappraisal is going down, and it has some commercial real estate property owners concerned.
Although how much the value decreases won’t be official until April 20, the first formal notices of 2013 Shelby County property values for taxation purposes were mailed at the beginning of this month to owners of commercial and industrial cost properties.
The Shelby County Assessor of Property’s goal is to put the fair market value on the property as of Jan. 1. That’s what a willing buyer would pay for the property and what a seller would be willing to sell it for.
It’s both a complicated and political issue. If property values decrease as a whole, the city and county will likely raise the tax rate. But if you’re a landlord and your property values go up, that means you’re going to pay higher taxes.
“It’s like the old saying, ‘You don’t want your property value going up for the tax assessor, but you do for your banker,’” said Taylor Caruthers, owner of property tax consulting firm Caruthers & Associates Inc. “Especially if everybody else is going down, you surely don’t want yours going up as far as property tax goes.”
Caruthers said if the value goes down and the rates go up, the two should offset each other. He’s hearing from the assessor that overall property values went down 5 percent from the previous year, but the tax rate will be adjusted to reflect that.
“The way the law reads is that the city and county can’t have a windfall from a reappraisal, they have to go back and adjust the tax rate to reflect the previous year’s tax collection,” Caruthers said. “So more or less, the tax rate’s probably going to go up a little bit from this past year unfortunately for all of us. But if your property value went down from the previous year, then you shouldn’t be paying any more property tax than the year before.”
The only notices Caruthers has seen so far are preliminary on the properties worth more than $10 million. He said the values have gone up on Renaissance Center, the Forum buildings, Clark Tower, White Station Tower and all of the Highwoods Properties Inc.’s buildings, including Crescent Center. He’s also seen some retail that’s “pretty much stayed the same.”
Steve Guinn, vice president of Raleigh, N.C.-based Highwoods, said any property value increase, assuming that the tax rate stays the same, is going to mean more property taxes.
“Long-term, when operating expenses go up, your values go down,” Guinn said. “Rents would have to go up to counteract the increase in expenses. The question then would be has the market improved enough to allow rents to go up like that.”
But on the other hand, if expenses go up, that means the Net Operating Income on a building has gone down. If the same capitalization rate is used, that means the building’s value has gone down.
“There’s a little bit of an iterative loop going on there,” Guinn said.
As a general rule, Highwoods appeals its Memphis properties every year, not just in reappraisal cycles every four years, because “there are very few buildings which are static,” Guinn said.
One of the big factors that changes values is occupancy. Highwoods’ Poplar Avenue buildings don’t change more than 4 or 5 points in occupancy over a long period of time, but not all office buildings are that fortunate.
Take One Commerce Square, for example, which by May will lose its anchor tenant, Pinnacle Airlines Corp., dropping occupancy to 38 percent.
“They valued it at whatever number on (Jan. 1),” Guinn said. “If I’m the guys that own the building, I’m appealing this baby because it was 80 percent leased on (Jan. 1), but Pinnacle dropped the hammer down and April 2013, it’s only worth whatever.”
Tanis Hackmeyer, managing partner of Hackmeyer Properties, said one of her properties tripled in value in “probably the worst area that we own.”
“I don’t think that it would be any benefit whatsoever to have our values increased because you’ve got to look at the bottom line and you’re not going to be able to get all of that from the tenant,” Hackmeyer said. “I manage and lease our properties, and I try to cut expenses in any way I can, that’s something that I’m proactively doing, and you can only get so much rent out of a tenant. To retain them, you can’t go way up on their rent if they’re a little bit below market, otherwise you might lose them and they’ll go to somebody else that’s offering a better deal.”
Hackmeyer said the real estate market “affects everybody,” from low- to upper-income brackets.
“You’ve got to recoup that money somehow when you’re being taxed,” she said. “There’s no way we’re ever going to rebound completely if we keep having our taxes raised.”
While “the average Joe taxpayer” may think the assessor’s office is trying to raise values to get money, Caruthers said the assessor is supposed to be independent.
“All they’re supposed to do is place what they feel the market value of a piece of property is,” Caruthers said. “It’s up to the City Council and the County Commission to establish the tax rate based on that.”
Caruthers said if the tax rate is raised on commercial real estate that’s leased out, it will hurt the already soft real estate market. Because less income means the less the property is worth.
“(Landlords) can’t raise rents; it’s just so hard to lease a piece of property when the taxes are so high,” Caruthers said. “They’re already high. Shelby County, if you’re inside the city of Memphis, you have the highest tax burden in the state and probably one of the highest in the country.”
Memphis’ property tax burden is around 3 percent. High burdens are commonplace for cities like Chicago and Boston, which have stronger workforces than Memphis.
“We’re right up there with them,” Caruthers said. “Seems like to me you’d get so much for your money in a city like that.”