BEWARE OF NEW PROPERTY TAX LEGISLATION Many states are attempting to change established law, causing commercial property taxes to skyrocket. By Cynthia Fraser, Esq. o one wants to be blindsided subtract them in arriving at market thorities to change the definition of with additional tax liability. This Cynthia Fraser value for property tax assessment pur- real market valuation for property tax- Nis why many businesses belong Attorney, poses. ation purposes should worry commer- to industry groups that closely monitor Foster Garvey The result is that not only will a new cial property owners, and particularly liability for income taxes. Unfortunate- vacant space be valued as if it is fully owners of retail properties, given the ly, these same companies rarely stay on rented, but a second-generation retail continuing potential for prolonged va- top of legislation that may have a sig- space may be assessed under the cost cancy with the COVID-19 pandemic. nificant impact on their property tax li- approach as if it is fully leased. The For these properties to remain viable, ability. Tax legislation being passed and reality of lease-up costs, including the owners need to mitigate all costs, considered across the nation due to the holding costs and tenant improvement including property taxes. COVID-19 pandemic does not appear vestors’ appetite for large-box spaces, costs, are simply to be ignored. A reduction in property taxes can to address the significant tax liability and these effects have trickled down The International Association of benefit a property owner significantly. associated with property taxes for busi- to impair the value of smaller retail Assessing Officers (IAAO) recently Oregon has the benefit of a five-year ness. spaces. published a paper titled Commercial statutory hold, with some exceptions, Property owners may take for grant- The stay-at-home executive orders is- Big-Box Retail: A Guide to Market-Based on a successful appeal to property tax- ed that key precepts assessors use in de- sued by all state governors limited so- Valuation. This paper appeared to ig- es. Thus, a $100,000 reduction in prop- termining taxable value are so widely cial gatherings to fewer than 10 people nore generally accepted appraisal erty taxes through the appeal process held and accepted as to be immutable. and malls and retail stores across the methods for valuing these types of could result in a $500,000 savings. Almost every state’s tax law holds that nation were shuttered. The full impact properties and to advocate for the With the assessing authorities’ pro- a property owner pays property taxes on the retail industry and the brick and changes in accepted definitions of posed changes to the tax rules, how- on the asset’s “real market value.” Real motor store is yet to be known. property rights that taxing entities in ever, market realities and real market market value is the price a willing buy- many states are now seeking. Impor- value are compromised. er and willing seller would agree upon Questioning assumptions tantly, when American Property Tax in an open-market transaction. In the past several years, some as- Counsel reviewed the IAAO’s paper, Cynthia M. Fraser is an attorney specializing Unfortunately, even with the CO- sessing authorities have pushed to its lawyers found that many of the in property tax and condemnation litigation VID-19 pandemic, there will likely be change the definition of real market propositions cited in the paper were at Foster Garvey, the Oregon and Washington little property tax relief this year for value to disregard the perspective of a based on cases or laws that had been member of American Property Tax Counsel, property owners unless special legis- willing buyer in an open market, and overturned and were clearly inconsis- the national affiliation of property tax attor- lation is passed. This is due to the fact to instead create a false value as if the tent with established case law. neys. She can be reached atcynthia.fraser@ that the majority of states set the as- property were fully leased at market These attempts by the assessing au- foster.com. sessment date to Jan. 1 of each tax year. rates as of the assessment date. The COVID-19 outbreak was declared In Oregon, recent rules are being pro- a “Public Health Emergency of Inter- posed (and the theory tested in court) national Concern” by the World Health with the assumption that a property Organization (WHO) on Jan. 30, 2020. can always receive a stabilized rent However, it was not until March 11 that in the market place. Thus, an assessor WHO declared the novel coronavirus would use a property’s expected oc- outbreak a global pandemic and its cupancy and market rent in using the impact reverberated across the United income approach to determine the fee States. simple interest. The costs to get to a sta- In a retail real estate sector that has bilized rent, according to the new rules, COUNT reeled from widespread store closures cannot be applied to discount the stabi- and mounting competition from e- lized rent. Thus, a vacated department commerce, the lease rate for a lease in store, or a brand new vacant building, place may not reflect market rent. Thus, will be assessed as if it is receiving full it is the “fee simple” estate that is be- market rent without reflecting any of ing valued for tax purposes: What rent the costs associated to get there. does the market data support as of the For example, the proposed rule ON tax assessment’s date? states that it is implied in the cost ap- Valuing the fee simple estate at mar- proach that valuation reflect not only ket rent is a significant taxpayer pro- construction and materials but also all tection in the changing landscape of indirect costs, such as the cost of car- today’s marketplace for retail spaces. rying the investment in the property Sales of brick-and-mortar stores have after construction is complete but be- plummeted due to changing consumer fore stabilization is achieved, as well spending habits, a decline in interna- as all marketing costs, sales commis- KATE. tional tourism spending and a lack of sion and any applicable holding costs investor demand for many big boxes. to achieve a stabilized occupancy in a Every time SIORs walk into a room, their It is no secret that internet sales have normal market. Thus, even though the reputation precedes them. Experienced, knowledgeable and focused, SIORs represent battered the department store sector. taxpayer has not yet incurred all these the absolute best in commercial real estate. The resulting closures of large depart- expenses, they can be added to the tax- Access the world’s most elite network and ment stores have further dampened in- able value and the taxpayer may not open the door to game-changing opportunities. SIOR. Your next big win is just four letters away. Attempts by the assessing authorities to

change the definition of real market go.sior.com/kate valuation ... should worry property owners. www.REBusinessOnline.com Southeast Real Estate Business • May 2020 • 19