Retail centers have become the most “over taxed” properties on the tax roll. The blame lies at the doorstep of the owners.

In purchasing a shopping center, investors develop capitalization rates, look at internal rates of return, project market growth, and appreciate the synergy of creating proper tenant mix. Yet with all of their business acumen, they overlook the one thing that leads them to paying too much in property taxes: the “investment’ is a “going concern.” Its value as an investment does not equal market value for property tax purposes.

How does this happen? Many owners commonly assign the job of property tax review to their asset managers. The asset manager spends 364 days a year immersed in making the property out-perform competing centers. Performance drives every decision made by the asset manager. Then, one day a year, the asset manager reviews the actual performance of this going concern and compares it to the tax assessor’s opinion of fair market value. Many asset managers fail to realize that valuations based on real life performance aren’t what the law requires for determining market value for property tax purposes.

The laws in most states require assessors to base property tax assessments on the market value of the fee simple interest in the property and exclude any value attributable to intangibles. Asset managers and investors often overlook the differences between the fee simple valuation required by state law and the investment, going concern or leased fee value they use to evaluate the performance of their retail centers.

Fee simple valuations of retail centers rely on market driven variables that may or may not reflect the property’s actual performance. The fee simple valuation utilizes market rents, market occupancy rates and market expenses. Leased fee valuations, by comparison, value centers based on their actual performance. A leased fee valuation utilizes actual rental rates, actual occupancy and actual expenses to determine a center’s value. In a leased fee analysis, the owner always looks at the credit-worthiness of the tenant, the length of the leases in place and the tenant mix. A fee simple valuation ignores each of these investment criteria.

As indicated, the differences between investment, going concern or leased fee value and fee simple market value are many. Being aware of these differences and having trained professionals to articulate them to the tax assessor can save owners significant money, money that goes right to the bottom line.

Raymond Gray is a partner with the law firm of Popp & Ikard, Austin, Texas, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at raymond@property-tax.com