PANDEMIC EFFECT ON PROPERTY TAXES
February 9, 2021
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guar antee, and forms part of the international BDO network of independent member firms. With You Today
DOROTHY RADICEVICH DANIEL FADDEN JOE CARR ROSS FORMAN Tax Partner, National SALT Senior Tax Partner Managing Director, Property Tax Leader Manager Corporate Real Estate Advisory
312-730-1364 312-730-1374 312-616-3946 904 396-4016 [email protected] [email protected] [email protected] [email protected]
2 PANDEMIC EFFECT ON PROPERTY TAXES Property Tax Overview
Property Tax Function Goals, Communication, Opportunities & Considerations
Agenda Commercial Real Estate Industry – COVID-19 Impact for Today
Commercial Real Estate Market Trends, Valuations & Predictions
Q&A & Closing Remarks
3 PANDEMIC EFFECT ON PROPERTY TAXES Do you have confidence the country will reopen in 2021, returning to a more pre-COVID style business and Question 1 social atmosphere? a. Yes b. No
4 PANDEMIC EFFECT ON PROPERTY TAXES Property Tax Overview
5 PANDEMIC EFFECT ON PROPERTY TAXES What is Property Tax? TOWNSHIPS 76% Property Tax SAMPLE REVENUE BY SOURCE 5% Miscellaneous AD VALOREM – “ACCORDING TO VALUE” 2% Interest A tax imposed by local government as primary source of income for local government services such as parks, 5% Charges for Service fire protection, police, schools, public works and public health >1% Other Minor Sources Ad valorem tax is based on the principle that the amount of tax paid 2% Intergovernmental should depend on the value of Sources property owned 2% State Motor Fuel Tax Valuation of property is as of the lien date (generally Jan. 1 of year) State Replacement 5% Tax
4% Other States Sources
6 PANDEMIC EFFECT ON PROPERTY TAXES TOTAL STATE & LOCAL BUSINESS TAXES 38% Property Taxes FY2019 21% General Sales Taxes
9% Corporate Income Tax
4% Unemployment Insurance Significance 6% Excise Taxes of Property 7% Individual Income Tax Taxes 5% Business and Corporate License
3% Public Utility Taxes
3% Insurance Premium Taxes
2% Severance Taxes
2% Other Business Taxes
From COST study “Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2019
7 PANDEMIC EFFECT ON PROPERTY TAXES Taxable Property REAL AND PERSONAL
All 50 states allow local jurisdictions to tax real property situated within the jurisdiction. Thirty-eight states tax personal property STATES THAT EXEMPT PERSONAL PROPERTY: and approximately 11 of the 38 states tax inventory. Delaware, Hawaii, Illinois, Iowa, Minnesota, New Hampshire, New Jersey, New York, North Dakota, Ohio, South Dakota, Pennsylvania
8 PANDEMIC EFFECT ON PROPERTY TAXES Taxable Property
REAL PROPERTY VS PERSONAL PROPERTY
Land and property directly attached to land: Property that can be moved/removed without Buildings compromising building structure – defined as assets that are not real property: Fences Vehicles Landscapes Furniture & Fixtures Driveways Inventory Mineral Deposits Machinery & Equipment Supplies Work-in-Process
9 PANDEMIC EFFECT ON PROPERTY TAXES JANUARY 1 Assessment Date
SEPTEMBER - DECEMBER JANUARY - MAY Tax Bills Issued Personal Property Tax Return Filings Property Tax Cycle
MAY - SEPTEMBER APRIL - JULY Assessment Appeals Real & Personal Property Assessments Issued
10 PANDEMIC EFFECT ON PROPERTY TAXES Assessment Assessment State Return Deadline Inventory State Return Deadline Inventory (Lien) Date (Lien) Date AK 1/1 Varies Varies MT 1/1 3/1 Exempt AL 10/1 12/31 Exempt NC 1/1 1/31 Exempt AR 1/1 5/31 Taxable ND Exempt Exempt N/A AZ 1/1 4/1 Exempt NE 1/1 5/1 Exempt CA 1/1 5/7 Exempt NH Exempt Exempt N/A CO 1/1 4/15 Exempt NJ Exempt Exempt A CT 10/1 11/1 Exempt PERSONAL NM 1/1 2/28 Exempt DC 1/1 7/31 Exempt NV 7/1 7/31 Exempt PROPERTY TAX: DE Exempt Exempt N/A NY Exempt Exempt N/A FL 1/1 4/1 Exempt OH Exempt Exempt N/A GA 1/1 4/1 Taxable Lien Dates OK 1/1 3/15 Taxable HI Exempt Exempt N/A OR 1/1 3/15 Exempt IA Exempt Exempt N/A PA Exempt Exempt N/A & Return ID 1/1 3/15 Exempt RI 1/1 1/31 Exempt IL Exempt Exempt N/A 1/1 Varies Exempt Deadlines IN 1/1 5/15 Exempt SC KS 1/1 3/15 Exempt SD Exempt Exempt N/A KY 1/1 5/15 Taxable TN 1/1 3/1 Varies LA 1/1 Varies Taxable TX 1/1 4/15 Taxable MA 1/1 3/1 Varies UT 1/1 Varies Exempt MD 1/1 4/15 Exempt VA 1/1 Varies Varies ME 4/1 4/30 Exempt VT 4/1 4/20 Varies MI 1/1 2/20 Exempt WA 1/1 4/30 Exempt MN Exempt Exempt N/A WI 1/1 3/1 Exempt MO 1/1 3/1 Exempt WV 7/1 9/1 Taxable MS 1/1 4/1 Taxable WY 1/1 3/1 Exempt
11 PANDEMIC EFFECT ON PROPERTY TAXES Property Tax Function Goals, Communication, Opportunities & Considerations
12 PANDEMIC EFFECT ON PROPERTY TAXES Which property tax function resonates the most with you? a. Managing administrative burden Question 2 b. Mitigating risk and exposure c. Reducing property tax liability
13 PANDEMIC EFFECT ON PROPERTY TAXES Ideal Goals of Property Tax Function
Manage administrative Mitigate risk Reduce property burden of compliance and exposure tax liability and tax payments
14 PANDEMIC EFFECT ON PROPERTY TAXES Communication
Staying apprised of major changes within the company is essential to maintaining an effective property tax function. Something as simple as changing a capitalization policy threshold can have ripple effects in reporting of assets and can result in under/over reporting of assets. Making time to meet with accounting, facility managers, and management on a regular basis can help stay ahead of the curve and know where the pitfalls may lie. Although the property tax function typically falls under the umbrella of the tax department, there are many stakeholders who can have influence in affecting property tax values. Soliciting input from finance, accounting, facility managers, and planning and development can go a long way in being prepared for major changes that might impact your properties.
15 PANDEMIC EFFECT ON PROPERTY TAXES Opportunities
Ghost Asset Removal Exemptions - Pollution Control/Minimum Thresholds Reclassifications Accelerated Depreciation Obsolescence Analysis- Functional and External Freeport Inventory Maximization Real vs. Personal Classification Idle Equipment Vacancy Changes due to Pandemic Audits
16 PANDEMIC EFFECT ON PROPERTY TAXES Considerations for Next Property Tax Cycle
Decreased Revenue Employment changes Factors contributing Layoffs, furloughs
Space Utilization Increased Expenses Vacancies due to virtual implementation, Safety requirements due to pandemic demand changes
Changes in Business Strategy Deferred Maintenance Product, service, logistics, inventory
Asset Utilization Lack of Ability to Invest Increased or decreased Industry freezes, liquidity, risk, tenant leases
17 PANDEMIC EFFECT ON PROPERTY TAXES Jurisdictional Activity
Increased Audit Activity - third parties Aggressive audit positions - supplies, spare parts, longer lives Delayed or frozen reassessments - Philadelphia, Nassau County NY Denial of disaster relief - TX, CA No relief of exemption requirements - OK Tax Rate Increases - Nashville (34% increase), City of Chicago (additional COLA annually) Removal of exemptions - NE $10k exemption Filing threshold - KY $1,000 or less of fair cash value Electronic Filings - Indiana Portal 2021 Backlog of appeal cases - CA Property Tax Situs - MI sourced to ordinary location for 2021
18 PANDEMIC EFFECT ON PROPERTY TAXES Commercial Real Estate Industry – COVID-19 Impact
19 PANDEMIC EFFECT ON PROPERTY TAXES Were you surprised to learn that property taxes make up more than a third of total state and local business Question 3 taxes nationwide? a. Yes b. No
20 PANDEMIC EFFECT ON PROPERTY TAXES Goals & Learning Objectives
Understanding of commercial real estate market trends and pandemic impacts The resulting impacts on different asset types, in different industries, in different geographies Forward-looking consequences on asset value
“The supply and demand for office space may change significantly. A lot of people have learned that they can work at home, or that there’s other methods of conducting their business than they might have thought from what they were doing a couple of years ago. When change happens in the world, you adjust to it.” Warren Buffett
21 PANDEMIC EFFECT ON PROPERTY TAXES Commercial Real Estate Market
The COVID-19 pandemic has had an uneven impact on the commercial real estate market The impact varies across industries, geographies and asset type
TREND PRE COVID-19 COVID-19
Hotel Occupancy average 67% Occupancy level dropped to 38%
L.A office leasing 18M sq. ft. & vacancy rate of L.A office leasing declined 44% & vacancy rate of Office 18.1% 22.5% National office vacancy 10.9% National office vacancy 17.1%
$41.3B in real estate sales $21.41 in real estate sales NYC $2.69B tax revenue $1.39B tax revenue
Retail 552 bankruptcies since 2012 610 bankruptcies in 2020
211M sq. ft. net of absorption for previous 5-year Industrial Expected 250M sq. ft. of net absorption in 2021 annual average
22 PANDEMIC EFFECT ON PROPERTY TAXES Retail sales declined Office occupancy An estimated 110,000 Impact of from 18% in May to -0.7% declined 84M sq. ft. in restaurants in America, or COVID-19 on in Dec. 2020, 40M sq. ft. of 17%, permanently closed E-Commerce hit $10.8B losses were in Q4 in 2020 Commercial in sales on Cyber Monday, National office vacancy 10,000 restaurants an increase of 200% from rate is 17.1% closed between Oct.- Real Estate 2016, with a 49% decline Office sublease space Dec. 2020 Market of brick-and-mortar foot increased more than Restaurant sales were traffic for the Black 50.7% to about 148M $240B less than expected Friday weekend sq. ft. Sales slumped 21.2% year 11,060 fashion store over year in Dec. 2020 closures in 2020 and anticipated 20,000 - 25,000 stores will be closed in 2021
Sources: CNN, Jll, Cushman Wakefield, Sourcing Journal, S&P Global, GlobeSt
23 PANDEMIC EFFECT ON PROPERTY TAXES Commercial Real Estate Market Trends and Valuations
24 PANDEMIC EFFECT ON PROPERTY TAXES Do you think the Chicago property tax increase tied to annual CPI will help close the projected budget deficit? Question 4 a. Yes b. No
25 PANDEMIC EFFECT ON PROPERTY TAXES Market Trends
U.S. market capitalization rate vary across industries: the industrial market cap rate for Q1 2021 is 6.4% compared to Q1 2020 of 7.4% and controversially the office market cap rate for Q1 2021 is 11.1% compared to Q1 2020 of 7.0% The U.S. vacancy rate is another variable that is impacted in the commercial real estate market. The retail industry vacancy rate for Q1 2021 is estimated to be 6.18% compared to Q1 2020 of 5.25%. However, there is still a decrease with the industrial market vacancy rate for Q1 2021, which is 5.9% compared to Q1 2020 of 5.4% The U.S. occupancy rate varies across industries. The office industry occupancy levels are 87.57% in Q1 2021 compared to 89.35% in Q1 2020. Similarly, the retail industry occupancy levels were 94.75% in Q1 2020 and estimated to be 93.81% at the end of Q1 2021
26 PANDEMIC EFFECT ON PROPERTY TAXES Market Trends
OFFICE MARKET RETAIL MARKET INDUSTRIAL MARKET
MARKET 12 Month Market 12 Month Market 12 Month Market Vacancy Inventory Vacancy Inventory Vacancy Inventory Rent Capitalization Rent Capitalization Rent Capitalization Rate SF Rate SF Rate SF Growth Rate Growth Rate Growth Rate Ne w Yo rk 10.5% -2.7%% 6.6% 951M 4.4% 0.4% 6.1% 609M 4.7% 3.3% 5.6% 832M
Boston 9.3% 0.06% 6.3% 352M 3.1% -3.1% 6.2% 241M 4.9% 4.8% 6.6% 347M
Chicago 13.4% -0.4% 7.8% 503M 6.3% -2.9% 7.4% 571M 6.3% 3.6% 7.0% 1.3B
Dallas 17.3% -0.2% 7.5% 399M 6.1% 0.9% 6.7% 440M 7.1% 4.0% 6.1% 990M
San Francisco 11.0% -8.4% 4.7% 180M 4.8% -4.5% 4.5% 81.9M 6.1% 1.5% 4.8% 94.6%
Los Angeles 12.6% -1.6% 5.8% 427M 5.4% -2.9% 5.4% 446M 3.3% 3.4% 4.6% 938M
Miami 10.8% 1.5% 6.5% 110M 4.4% 0.1% 5.7% 136M 5.2% 4.4% 5.8% 251M Washington, 14.4% -1.25 7.3% 507M 5.1% -0.2% 6.4% 264M 5.9% 3.0% 6.6% 266M D.C
27 PANDEMIC EFFECT ON PROPERTY TAXES Commercial Market Valuations
Commercial real estate sales in Q4 2020 declined 1% for a year-over-year basis Property values for hotels/hospitality declined 6%, retail declined 6% & office space declined 4% Property values for apartments increased 1%, industrial assets increased 2% and land increased 4% Commercial real estate prices decreased 9% year-over-year in Q4 2020
28 PANDEMIC EFFECT ON PROPERTY TAXES Future Trends & Predictions
Sources: Bloomberg, U SA Today, CBRE
29 PANDEMIC EFFECT ON PROPERTY TAXES FUTURE TRENDS & PREDICTIONS Industrial Industry will Flourish in 2021
Estimated net absorption of 250M sq. ft. of industrial space due to growth of e-commerce in 2021, which is more than the previous 5- year annual average of 211M sq. ft. Vacancy rates will continue to decrease, rental rates will continue to reach record-high levels and robust development The industrial space has been one of the most resilient commercial real estate sectors due to the increase in demand driven by e-commerce. YoY growth surged to 44.5% in Q2 2020 compared to 14.8% in Q1 2020 Occupiers will expand their locations and size of facilities to accommodate the customer reach, inventory control and supply sourcing
30 PANDEMIC EFFECT ON PROPERTY TAXES FUTURE TRENDS & PREDICTIONS Retail Industry will Continue to Grow in 2021
Retail industry will continue to grow in brick-and-mortar stores as e-commerce sales will slow in 2021 New emerging retailers and opportunists will capitalize on CRE conditions to absorb vacancies from bankrupt retailers Class B and Class C malls will have adaptive reuse and reposition in 2021 as they were hit the hardest by COVID-19 Brick-and-mortar stores will be extremely valuable in providing customers with engagement and a physical experience for a deeper customer relationship Absorption of the vacant retail space will be let by digital brands, medical suites, health and wellness and even automotive showrooms
31 PANDEMIC EFFECT ON PROPERTY TAXES FUTURE TRENDS & PREDICTIONS Office Industry will Stabilize in 2021
Rents will still fall as vacancies continue to rise but a gradual re-entry of employees will increase office activity Class A office space will recover quickly with more progressive portfolio strategies to support new employee workstyles impacted by COVID-19 There will still be an accelerated pace of hiring even as occupancy declines Suburban office markets expected to recover faster than the urban offices, especially in downtown locations
32 PANDEMIC EFFECT ON PROPERTY TAXES Conclusion
The faster the global economy improves from the COVID-19 pandemic impacts, the faster the commercial real estate economy will improve Large amounts of uncertainty will remain present in 2021 with market recovery; office space demand will remain muted while the industrial spaces will continue to surge The future winners in the commercial real estate market will be industrial/logistics, data centers and life sciences The industries in the middle will be office and multifamily The most challenged occupiers in the CRE market will continue to be retail
33 PANDEMIC EFFECT ON PROPERTY TAXES Does your company conduct meetings with accounting, finance, facility, or planning and development decision- Question 5 makers on a regular basis? a. Yes b. No
34 PANDEMIC EFFECT ON PROPERTY TAXES Q&A & Closing Remarks
35 PANDEMIC EFFECT ON PROPERTY TAXES Property Tax Call to Action
Review your business profile over the 1 last 12 months for factors affecting business. (Page 17)
Determine if any factors identified 2 can be incorporated into current compliance.
Review all assessment notices prior to 3 deadline for potential appeals.
36 PANDEMIC EFFECT ON PROPERTY TAXES