Here are a number of approaches to defending against excessive tax assessments.

Countless companies have seen their top and bottom lines decimated by COVID-related shutdowns, travel restrictions and changing consumer preferences since the start of the pandemic. Yet for many taxpayers, property tax values have changed little or even increased.

Many of these taxpayers have been surprised to receive property tax bills that do not reflect the real and lingering economic challenges that the retail, hospitality, office and other industries have, are, and will continue to face. These taxpayers – and even those in industries better suited to weather the storm – should give special attention to ensuring they receive fair and reasonable assessments.

Observe Valuation Dates, Notices and Appeal Deadlines

With a large percentage of employees working remotely, together with an inconsistent postal service, it is more important than ever to have dedicated employees and knowledgeable property tax professionals reviewing property value assessments annually and filing timely protests when warranted. Failure to receive a tax valuation notice rarely excuses a missed protest deadline, so it is vital to know and comply with applicable deadlines.

Many property tax bills issued in 2020 were based on statutory valuation dates that preceded the emergence of COVID-19. For instance, assessors working under a valuation date of Oct. 1, 2019, or January 1, 2020, were quick to tell taxpayers to "wait until next year" before assessments could reflect any impact from COVID-19.

Not surprisingly, some assessors are now arguing that the pandemic was temporary and that its worst effects have passed. In some jurisdictions, assessors simply carried forward the prior year's cost-based value with no adjustments to account for additional depreciation or functional and economic obsolescence. In other cases, assessors have relied on pre-pandemic sales during the relevant tax cycle to justify increases over the preceding tax year.

Many locales had few sales in the early stages of the pandemic, and in these cases, the assessor may downplay or entirely ignore the actual impact of COVID-19 on market values. In contesting assessments in each of these cases, it is helpful to not only demonstrate the immediate difficulties that began in March 2020, but also the pandemic's lingering effects on the taxpayer's current and future operations.

Although the pandemic has affected all industries, certain sectors face unique challenges that will persist well beyond the initial virus surges and vaccine rollouts. These include, but are not limited to, brick and mortar retailers competing with ever-expanding e-commerce, office buildings competing with flexible work options including remote work, and hotels competing for elusive business travel in a cost-cutting environment. Some of these challenges are trends that began long before the pandemic, such as the slow death of enclosed malls as consumers increasingly favor lifestyle centers and online shopping.

COVID-19 Influences by Property Sector

Retail. Since the early 2000's, e-commerce's share of total retail sales has increased each year. The pandemic accelerated that trend, arguably by years, when people who had long resisted shopping online no longer had the same in-store options, and experienced online shoppers became more comfortable buying things like groceries and large-ticket items online.

These evolving shopping habits certainly affect the desirability and value of retail real estate, especially of those buildings constructed before the scope of today's e-commerce world could be contemplated. Landlords must now think outside the box when re-tenanting shopping centers, often filling vacancies with restaurants, service and entertainment concepts. These uses can create parking, zoning and other challenges for centers built for traditional retail.

In the case of big box stores, companies such as Walmart are looking at converting portions of existing stores to warehouse or fulfillment space for e-commerce. All these changes to keep up with the rapidly evolving marketplace shine a light on the functional and economic obsolescence present in many retail properties.

Office. Office landlords are also facing rapid market evolution, including an accelerating trend toward more remote and flexible work options. The pandemic made Zoom meetings ubiquitous and gave employees a taste, and perhaps a future expectation, of more work-from-home opportunities.

In light of the Delta variant's spread, many large companies have delayed their anticipated returns to the office, with Google now postponing its return until at least January 2022. Although some of the pandemic's effects on office occupancy have already occurred, the full impact will continue to play out as leases expire and companies reevaluate the volume and design of office space they require.

Hospitality. The hotel and travel industry suffered some of COVID-19's most immediate and devastating financial casualties. Leisure and business travel ground to a near halt, with hotel stays and flight counts falling to once-unimaginable lows. Corporate travel has yet to make a meaningful recovery and remains at a fraction of pre-pandemic levels. Throughout the country, corporations are cutting back on travel budgets as they weigh its costs and health risks against alternatives such as video conferencing.

Business travel and events are unlikely to return to pre-pandemic levels until 2024, according to a recent American Hotel & Lodging Association survey. Although the leisure travel industry benefitted from pent-up demand during the summer of 2021, the Delta variant has undermined that temporary resurgence. And even with the recent increase in leisure travel, airplane traffic is still well below 2019 levels.

These are just a few of the industries that will continue to see COVID-19 weigh down their businesses and property values. Property and business owners should closely review their property tax values to make sure assessments adequately reflect the specific challenges affecting their properties, to include the pandemic's immediate, ongoing and future financial impact.

Strategies for getting value adjustments on assets impacted by the pandemic, from attorney Cynthia Fraser.

Last January I penned an article for this publication titled: "Will 2021 Bring Property-Tax Relief?" I never imagined we would enter a second phase of outbreaks and continued economic fallout related to COVID-19.

Because most states assess property for taxes as of Jan. 1 each year, last year's assessments did not reflect the pandemic's catastrophic impact on real estate in 2020. This year, as jurisdictions certify tax rolls to reflect real market values as of Jan. 1, 2021, property tax relief may depend on the taxing jurisdiction's recognition of external obsolescence due to COVID-19.

Businesses and commercial properties in my hometown of Portland, Ore., are still suffering from not only work-from-home policies and social distancing mandates related to COVID-19, but also the long-term effects of civil unrest downtown following the death of George Floyd. While downtown experienced a glimmer of revival this summer, many once-vibrant small businesses and restaurants remain boarded up or vacant. Whether from COVID-19 or riots, these external influences affected property market value during 2020.

Across the nation, many companies have extended remote-work policies through the end of the year, leaving office buildings a ghostly reflection of their bustling heydays and slowing recovery of commerce dependent on office worker customers.

A visible occupancy decline for commercial real estate that housed offices, restaurants, small retail stores and hotels should be hard to ignore. Unfortunately, tax assessors have been reluctant to recognize these realities when assessing taxable property value, even when the marketplace reflects downward trends.

Obtaining relief will require the taxpayer to effectively document the market impact of COVID-19 during 2020 and into 2021. Their focus should be on the market, property class, rents, vacancies and property sales, as well as the property characteristics that tenants and investors were seeking on the date of value, Jan. 1, 2021. The following paragraphs cover key points to consider.

Will Workers Return to the Office Full Time?

The office market may undergo the most significant long-term adjustments to the pandemic. In fact, office changes that started in 2020 will continue into this next tax year. The shrinking of office footprints appears to be lasting as remote work becomes acceptable and, in fact, necessary to attract and keep talent.

Younger office workers in particular are voicing a strong desire to work from home permanently or part-time. The reality is that most office workers have gotten off the merry-go-round of spending 12 hours of each day commuting and working. Walking to the kitchen table or a bedroom office with coffee in hand has its appeal to many.

Work from home may be a necessity for many with younger children at home. During 2020, most schools and daycare facilities closed completely, leaving parents no choice but to pivot to full-time daycare on top of work.

Likewise, in 2020 businesses began projecting space needs going into 2021. In Portland, mass transit operator TriMet polled its workers and found an overwhelming aversion to a return to the office. Accordingly, the public agency reduced its office footprint, redesigned workspaces to accommodate "hoteling" or shared workstations, and allowed many employees to permanently work from home. The private industry is quietly following suit, as 2021 shows no real slowdown in COVID-19.

The Hotel Industry Languishes

Perhaps no other industry has been harder hit than the hotels and conventions industry that collapsed in 2020. Not only did pleasure travel come to a standstill, but Zoom meetings and virtual conventions replaced business travel to become the new normal in 2021. The result was high vacancy in 2020 and lingering uncertainty over how long these properties will continue to be underutilized, sending a ripple effect through other commercial spaces.

The Market Wild Card: Housing

The wild card for 2020 was housing. Single-family homes across the nation saw exponentially rising prices that should make a tax assessor's heart soar. However, rent moratoriums for most of 2020 devastated some landlords. Documenting the costs associated with nonpaying renters, including higher management fees for evictions, may be used for challenging this past year's taxes. Rent moratoriums are an external market force outside a landlord's control, making them an incurable, negative external factor.

Demonstrating External Obsolescence

When requesting a lower assessed value for 2020, taxpayers should be ready to show how pandemic effects contributed to external obsolescence for their properties, requiring a depreciation adjustment to real market value. It will be important to address not only how changing occupier demand is affecting values in that property type but also the real estate's location and the degree to which its value depends on the surrounding submarket.

Identify all external factors, including those addressed in this article that impacted the property in 2020. These are economic influences outside the taxpayer's control and create an external obsolescence to the property that is incurable.

Appraisers recognize external obsolescence as an acceptable valuation adjustment to a property's market value. The Appraisal of Real Estate, published by the Appraisal Institute, recognizes the term and its application as a form of depreciation.

External obsolescence can be temporary or permanent and has a marketwide effect that typically influences an entire class of properties. This depreciation or obsolescence adjustment can be applied on a year-by-year basis to reflect the impacts of COVID-19 on the real estate for 2020.

Any assessor's argument that there may not be long-term impacts on the real estate is irrelevant to the 2020 assessment year when using an external obsolescence adjustment. For tax year 2020, at least, there can be no doubt that the majority of commercial real estate was hit hard by the pandemic and merits an external or economic adjustment. When approaching the assessor to request a value reduction for 2020, come prepared with economic market data to support an external obsolescence adjustment.

How to use these factors to reduce a senior living property's tax assessment.

The longstanding debate over intangible value in commercial real estate taxation rages unabated, and nowhere is the squabbling fiercer than in valuing seniors living facilities. Because these properties generally transact based on income from a going concern rather than from real estate, taxpayers planning to acquire a seniors facility should consider how to separate intangible value prior to acquisition. Simply waiting for the annual tax bill is a recipe for incurring inflated cost and an inferior investment return.

Skilled nursing facilities, assisted living and other seniors housing subtypes often require state-issued licenses personal to the operator. Critically, seniors housing sales typically involve the transfer of a going concern including a valid operating license, assembled workforce and other business assets required for the operation. In other words, sales involve more than just the real estate, and the intangible personal property component involves more than just goodwill.

Acquisition pitfalls

A seniors housing owner's overall return may hinge on tax consequences. Common considerations include real estate transfer taxes, allocation of basis for income tax purposes, real and personal property tax assessments, and segregation of readily depreciable or amortizable assets from non-depreciable or non-amortizable assets.

A common mistake is to use the transaction price as the consideration in the deed. That consideration is the basis for transfer taxes and should exclude tangible and intangible personal property value. Many assessors will revalue the property based on deed consideration, which is easily identifiable and theoretically reflects both parties' valuation of the land and improvements. Thus, citing overall transaction value on the deed can lead to inappropriate excessive taxation.

Instead, define consideration in an allocation agreement at or before closing, which is when the property's federal income tax basis is determined. This generally identifies four components: land (non-depreciable); buildings or improvements (generally depreciable); tangible personal property (generally depreciable); and goodwill or ongoing business value, represented by intangible personal property or business enterprise value. A cost segregation study is helpful but not required.

Loans secured by senior living facilities often pose valuation challenges. Lenders underwriting on a going concern basis need to address whether the state-issued licenses can be secured. The Small Business Administration requires SBA lenders to obtain a going-concern appraisal for real estate involving an ongoing business. Those appraisals must value the separate components and be completed by an appraiser trained in valuing going concerns.

The federal Office of the Comptroller of the Currency, which regulates commercial banks, requires lenders to use a competent appraiser but does not specify appraiser course requirements.

Property tax issues

State law generally requires tax assessors to value only real estate, based on a hypothetical transaction involving the real estate only. Therein lies the rub, because the property's income reflects a combination of real property and tangible and intangible personal property. There is now general agreement that hotels and most seniors living facilities involve intangible value.

The problem is isolating the intangible value. For example, in a 2020 decision involving Disney's Yacht & Beach Club Resort, the Florida Court of Appeals noted that though the nearly 1,200-room hotel's business and real estate values are linked, the assessor is required to value only the real estate, not the going concern.

Some older literature suggests that real estate value contributes only 73 percent to the value of independent living properties, 53 percent to assisted living values, and only 36 percent to the value of a skilled nursing facility. The remaining, non-taxable value, is from the going concern.

The Appraisal of Real Estate provides that going-concern value "includes the incremental value associated with the business concern, which is distinct from the value of the tangible real property and personal property." The Dictionary of Real Estate Appraisal, 6th Edition, defines intangible property as "nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment."

State-issued seniors housing licenses fall squarely in the definition of intangible personal property but can be difficult to value, demanding business valuation skills in addition to real estate appraisal skills.

Appropriate approaches

Appraisers typically try to value real estate using the cost, sales comparison, and income approaches, none of which fit seniors housing well. Moreover, charged with valuing many properties, assessors often employ mass appraisal techniques ill-suited for valuing complex going concerns.

Sales comparison drawbacks include the skewing effects of portfolio sales. Common in seniors housing, portfolio prices can obscure the consideration for individual properties or may include significant price premiums over individual sale prices, for reasons completely separate from real estate value.

Some appraisers will use the nearest multifamily sale as a comparable transaction. Yet most types of seniors housing offer abbreviated individual kitchens, if any, and smaller individual living spaces designed to encourage seniors to use the common facilities. If an appraiser is going to use a traditional multifamily property as a comparable, it must be adjusted to retrofit the property as conventional apartments.

To use an income approach, the appraiser must recognize that a huge portion of the seniors housing rent is not attributable to shelter but to services. As noted, seniors apartments are typically designed to get people out of individual units and into common areas. Common spaces usually generate higher expenses and are built to encourage the use of services such as shared dining rooms.

Similarly, compared with standard apartments, expenses for seniors living facilities involve higher maintenance, utility, management and administrative fees generally associated with the property's intangible value. Further, continuing care retirement communities exercise significant synergies between service levels as residents age. Proper analysis of these income and expense figures requires expertise generally removed from an assessor relying on mass appraisals.

Recognizing that many seniors living facilities include substantial intangible value, a 2017 white paper by the International Association of Assessing Officers (IAAO) suggests the cost approach is the proper method for extracting intangible value. Replacement cost certainly offers an easily understandable way for extracting that value.

While correct in valuing new construction, however, the cost approach has questionable utility for older facilities. Replacement cost will often not reflect value, since one can question whether a seniors facility would be rebuilt in the absence of a license. That raises a problem best analyzed as whether the facility represents the property's highest and best use.

The real valuation answer is anything but simple.

At its heart, the debate over how to value seniors care facilities rests on assessors engaged in a hypothetical exercise which is not reflective of the market. Without agreement on how to value the real property when a transaction involves a going concern, the debate will continue.

Self-storage has become a hot investment and values are up, but many owners find themselves with excessive property-tax bills that eat into their cash flow. Here's an overview of how tax assessments are made and some ways to potentially lower your bill.

Self-storage facilities continue to command great cash flow, but many owners find themselves funneling more of their income toward exorbitant property-tax bills. Those who take the time to review their assessments and liabilities with a local expert often discover they're being taxed unfairly. This is why you should identify and question your assessor's methods, assumptions, data and calculations. By exercising your right to contest your assessment and presenting a convincing argument, you might be rewarded with a lower tax bill.

Self-storage is especially vulnerable to errant valuations by assessors who fail to differentiate taxable from non-taxable value. Key questions include whether the sale of a self-storage facility is completely subject to transfer tax and if the price directly equates to taxable value for real property tax. It can be argued that much of the value associated with self-storage is business value and personal property, which is typically exempt from transfer or property taxes.

Let's examine how self-storage tax assessments are made and arguments you can use to contest one assigned to your own property. A successful appeal can save significant money, so it's worth pursuing.

The Trouble With Assessment

Arguing that the value of your self-storage facility is largely derived from non-real-estate sources can be problematic. Much of the difficulty comes into play when the assessor obtains a copy of the finance appraisal, or when a purchase and sale agreement includes an allocation separating the real estate from non-realty items.

Assessors want to believe that all the value in a sale or from financing is derived from real estate. In the Ohio case St. Bernard Self-Storage LLC vs. Hamilton County Board of Revision, the state supreme court stated that although the purchase and sales agreement carved out goodwill in the acquisition price, it was unconvinced that the sale of a self-storage facility had any goodwill. Conversely, lenders are often unable to lend on value that isn't attributable to real estate.

For property owners, the first step toward minimizing taxes and maximizing their financing is watching definitions; the definition of the interest being appraised is paramount. Appraisers can properly find for two different values on the same property, depending on whether they're valuing for the purpose of financing or tax assessment, so it's important to establish the interest being appraised.

When it comes to financing, lenders can and do lend on the stabilized value of a property performing as a going concern. In other words, they're appraising the property's leased fee value. So, for financing, appraisers can rightfully take into consideration the income from the operation at stabilization, but that isn't necessarily true for tax assessors.

Many states require assessors to value the fee simple interest in the real property only. The fee-simple appraisal is based on the real estate value alone and excludes value from the return of and on personal property. When it comes to self-storage, the assessor's calculation of taxable value must ignore value associated with units, computer systems, national marketing and so on, based on circumstances. Individual units are capable of being assembled and disassembled, which means they are at best a business fixture and not real estate.

Many assessors and appraisers recognize the removal of the depreciated value of personal property, which means they must also remove the personal property—and any income attributable to it—from the going-concern value. The comingling of values from multiple sources is especially evident when there's a sale.

Arguments in Your Favor

When the assessor cites a tax assessment based on the sale of your self-storage property, you can make several arguments. First, look at the building's construction and acquisition costs without factoring in things like security, computer systems, marketing and individual units.

If your facility was recently converted from a different type of building, that too can give you an advantage. Properties like those transformed from big-box retail space often trade at much lower price before lease-up and stabilization, and the conversion costs are typically associated with the personal property and eventual occupancy. So, as the owner, you can present sales of comparable pre-conversion properties to support an argument for a reduced assessment. It's better than using the sales of operating self-storage facilities as comps because there's no need to remove the personal property from the equation.

In cases when there are few comparable sales of big-box properties to reference or your self-storage facility truly isn't comparable to others that have been sold, it's appropriate to assess the property based on the replacement costs associated with building new. However, the appraiser should stop short of including costs specific to individual units, otherwise they'd need to apply depreciation from all sources, including age and any economic or functional depreciation.

The last line of counterargument is based on the income approach to valuation. Income-based assessment is the most complex when it comes to removing non-realty income. The easiest and cleanest way to respond is to look at examples of same-generation retail or light-industrial rents.

That said, when trying to defeat a sales price, it may be necessary to look at the actual income and then determine the appropriate amount for the non-realty value. Appropriate income will be based on the initial investment to install personal property as well as the return from that personal property. The income derived from that non-realty component is then removed from the actual net income. This is an activity easier said than done, but appraisers can establish the return. After removing the non-realty income, they should apply an appropriate capitalization (cap) rate to arrive at the property value.

Preferably, the cap rate used by the appraiser or assessor should be created from a mortgage constant and equity returns rather than from sales of comparable self-storage facilities because cap rates from this industry have comingled interests.

As you can see, it's appropriate for self-storage owners to use different values for their property, including one for financing and another for taxable or assessed value. These will differ because the appraisals that produce them are truly measuring different property interests.

It's critical for landlords to understand how variations in performance affect property tax liabilities.

Property tax assessments of shopping centers and other retail real estate may not capture the full extent of value losses those properties sustained in 2020. To avoid paying more than their fair share of taxes, it is important for retail owners to examine how market conditions affect each aspect of the tax assessor's approach to valuing their real estate.

In most jurisdictions, assessors value real estate for property taxes as of Jan. 1 of each calendar year. Most appraisal districts assess retail properties at market value derived from the income approach, as would an investor looking to acquire one of these properties. Market value in this case is the probable price at which a property would sell in a competitive and open market, where the buyer and seller are motivated, well informed and acting in their own best interest, and with reasonable exposure time and typical financing.

In a stable environment, most appraisal districts' assessors capitalize the prior year's net operating income to reach a market value. Since the 2020 retail property market was less than stable, a modified approach could be to start with a stabilized value, then calculate the rent loss and leasing costs required to stabilize the asset.

The pandemic and stay-at-home orders affected retail property subtypes in varying ways, and performance often varied from property to property within a subtype through most of 2020 and into 2021. Multitenant strip centers saw large occupancy declines as a 20% drop in customer traffic nationwide left many tenants unable to pay rent.

Mall Mayhem

Malls were among the hardest hit properties. Foot traffic in some malls dropped nearly to zero and mall anchors including JC Penney, Macy's, and Dillard's began liquidating many locations. Prior to the pandemic, enclosed shopping malls and brick-and-mortar stores were already struggling to maintain customer traffic related to massive increases in ecommerce. The effects of changing consumer behavior, in addition to mandated stay-at-home orders, accelerated this shift to ecommerce, and many mall-based tenants closed their doors completely.

Big box retailers arguably fared better than other store categories, as those designated as essential businesses remained open throughout 2020. Because of this, in many cases sales volume at big box retailers (especially those with grocery components) outpaced sales at other retail property types. Store sales do not equal market value for the purposes of property tax assessments, which underscores the need in 2021 for property owners to be more aware than ever of tax assessors' valuation standards.

While appraisal districts may emphasize increased sales volume in big box retail, property owners need to remember that business performance does not equal real estate value. Store sales may be up, but an increasing percentage of these sales come from online orders. Property owners must prove that, despite increased sales volume overall, big box property values are generally flat or decreasing. Ecommerce has weighed on real estate values for the past few years and has forced big box retailers to re-evaluate their approach to storefronts.

Rent Adjustments

The pandemic forced property owners to make significant rent concessions to keep tenants in place throughout 2020, when those occupiers were able to do so. These rent concessions should reduce effective rents in the retail market, with variation by location and submarket. Additionally, with a large portion of tenants unable to pay rent, the retail market saw massive collection losses and climbing vacancy rates.

If a property is operating below average market occupancy, the assessor or appraiser must include a discount for lost rent or an adjustment for the cost of lease-up. Together with rent concessions, increased vacancies reduce the effective gross income these properties can produce.

Since most multitenant retail leases are structured on a triple net basis that requires tenants to pay for taxes, utilities, common area maintenance, administrative expenses and insurance, property owners are on the hook for 2020 expenses that they would normally pass through to tenants who are no longer in place. This could expose property owners to increased levels of risk.

The pandemic also compelled property owners to reallocate capital expenditures to make buildings more resilient to virus transmission risks. As a result, other necessary capital expenditures may have been deferred, which could impact the bottom line and increase the difficulty of finding potential buyers for these properties.

Questionable Cap Rates

After calculating net operating income, appraisal districts will then capitalize that income with a chosen capitalization rate to determine market value. The pandemic's effect on cap rates is difficult to ascertain, however, and lenders have grown more cautious. The increased risk associated with retail properties today requires an upward adjustment in cap rates, with a correlating decrease in property market values.

Property tax is a significant expense to the property owner, with numerous issues and nuances to consider. Managing this cost may appear daunting but can be accomplished effectively with the correct understanding of the market conditions affecting the property. It is important to understand the subtleties of how assessors value the property, or to partner with an experienced advisor with that knowledge. SCB

Cris K. O'Neall of Greenberg Traurig on new avenues for challenging property tax assessments.

Changes brought by the recent pandemic continue to impact the property tax regimes of many states. Clearly, COVID-19 greatly reduced property values and property tax revenues, particularly where real estate markets determine the fair market value used in setting assessments.

But the pandemic has had other far-reaching effects, some of which may continue for years to come. Here are three trends reshaping property tax dynamics, and ways taxpayers can use those factors to reduce their tax liability.

1. Downturn Horizons Extend (Will Things Ever Return to Normal?)

Many property types have experienced value declines over the past 18 months. The question is how much longer the declines will continue. For example, will hospitality property revenues and values rebound in 2023? Or 2024? Will consumers continue to make online purchases, as they were forced to do during the pandemic, forever abandoning the traditional brick-and-mortar retailing outlets usually found in power centers and shopping centers?

The difficulties in estimating time horizons for the recovery of real estate markets creates uncertainty. At the same time, it presents opportunities for short-term and longer-term property tax relief for many property owners and managers. This is particularly the case where pandemic-driven change has permanently changed markets and created "new normals" for some real estate subsectors.

2. Local Tax Authorities Offer More Leniency

When the pandemic commenced in spring 2020, property owners sought to extend the time within which property taxes had to be paid. Rather than penalize property owners for not paying by deeming them in default, many jurisdictions allowed property owners more time to pay, extending deadlines that were once thought unchangeable. Some jurisdictions extended deadlines for more than just payment: They gave taxpayers additional time to file property renditions, property tax appeals and exemption requests.

While many tax advisors expected this leniency to cease following the worst of the pandemic, the opposite has happened. Some property tax jurisdictions continue to give taxpayers more time to pay and have extended deadlines to comply with filing requirements. An example of this is seen in the California State Board of Equalization's July announcement that it plans to author legislation giving the tax agency more power to extend deadlines under certain circumstances.

3. Restricted Access Drives Property Value Declines

COVID-19 has tested and perhaps expanded the valid reasons taxpayers can cite to prove property value declines and seek property tax reductions in many states. Prior to the pandemic, taxing jurisdictions were quite willing to grant property owners value reductions and property tax refunds for properties damaged by fire, earthquake, flood or other calamities. But such value reductions were always based on the physical condition of the property: If the calamity caused physical damage to the property, making it less useable, then a value reduction and tax refund would be granted.

The pandemic changed this. COVID-19 had the unique effect of making properties unusable and, therefore, less valuable solely due to restricted access. Public health concerns in general and government orders prohibiting citizens from frequenting public places depressed property values without inflicting any physical damage at all. Thus, government stay-at-home orders and public health fears made ghost towns of shopping centers, hotels and resorts, entertainment venues and other places where large crowds previously congregated. Almost overnight, the values of those properties greatly declined, sometimes to a fraction of pre-pandemic values.

Existing laws relating to property tax relief were not written to address restricted-access value declines. Nevertheless, many local assessors recognized the effect of pandemic-driven property value declines, including those caused by restricted access. Some taxing jurisdictions have even been proactive in reducing assessments due to downturns caused by COVID-19 in selected real estate markets, not waiting for taxpayers to file administrative appeals or lawsuits challenging property tax assessments. For example, California county assessors have asked commercial property owners to voluntarily submit valuation data early in the assessment cycle in order to reduce assessed values before the deadline for filing property tax appeals.

Despite recent real estate market value declines and efforts by local assessors to recognize such losses, the values of property tax rolls have continued to grow. In Los Angeles, the largest property tax jurisdiction in the U.S., the assessment roll increased by 6 percent during 2020, which was consistent with the preceding three years. Tax assessment rolls in San Francisco and San Diego hit record highs during 2020. Miami, Seattle and even Oklahoma City experienced similar increases. This stable growth of property tax rolls during the pandemic has allowed assessors to grant assessment relief to properties most affected by restricted access.

So the question arises, how long will local assessors continue to give COVID-19 property tax relief? Further, have the pandemic's restricted-access property value declines created new opportunities for future property tax value reductions? Time will tell.

Property Tax Reduction Opportunities Abound

The pandemic has created many opportunities to reduce property taxes, particularly in states where assessments reflect fair market values, and especially in sectors hard hit by restricted access issues. Uncertainty as to when market values will rebound, if ever, means property value reductions may remain in effect for more than a few years or assessment cycles.

Furthering this opportunity is the willingness of local taxing jurisdictions to extend deadlines and consider pandemic-induced property devaluations, including those caused by restricted access. This year and next, and perhaps beyond that, property owners and managers would do well to work with local taxing authorities to reduce their property tax assessments and, if need be, file property tax appeals.

Simultaneously protesting an assessment and a government taking can put taxpayers in a quandary.

There are multitudes of ways for property owners to reduce their tax burdens, as well as missteps that can derail a tax strategy. With that in mind, taxpayers should beware of trying to prove a low value for a tax appeal while simultaneously claiming a higher value in another proceeding. And here is how it can happen.

Protesting a high assessment

Most real estate taxes in the Northeast -- including those in New York, Pennsylvania, Connecticut and Massachusetts -- have an "ad valorem" or "value-based" assessment method. Thus, the greater a property is worth, the higher its real estate tax burden. A property tax bill is calculated by multiplying the property assessment by the tax rate. The assessment or taxable value is determined by the local assessor or board of assessors and is typically a percentage of market value.

This percentage varies among states and even municipalities. In New York, it is based on a comprehensive analysis of sales. The percentage is released annually by the state's Office of Real Property Tax Services and is different for each municipality. Connecticut sets its percentage by statute. In Pennsylvania, it is set by the state's Tax Equalization Board. But regardless of the state or method, local statutes fortunately allow property owners to reduce their real property tax burden by protesting the assessment they receive.

To successfully appeal a tax assessment, property owners must file a tax appeal and conclusively prove a lower market value. There are a few accepted ways to do this, namely the sales comparison, income capitalization, and cost approaches to determining value. No matter which method is used, the calculation must value the property according to its actual use and condition as it existed on a specific date in the past. New York designates this as a taxable status date and most states use the same or a similar term.

Asserting a higher value

The "actual use and condition" guideline in setting taxable value stands in stark contrast with condemnation and eminent domain guidelines, which value property when it is taken for a public purpose. In that scenario, the property must be valued according to its highest and best use, regardless of how the property is actually being used.

When the government takes private property for a public purpose, it must compensate the owner for the damages to the property's most valuable use. This valuation standard is known as "highest and best use," and has a specific meaning in the appraisal and eminent domain world.

According to the Appraisal Institute's reference text, "The Appraisal of Real Estate," and a multitude of state and federal court cases, the highest and best use of a property must be (1) physically possible, (2) legally permissible, (3) financially feasible, and (4) maximally productive. A taxpayer building a case for maximum value will typically need a lawyer, along with an appraiser and/or engineer, to evaluate these four categories for the specific property, look at the range of uses that qualify under each of those categories, and then conclude which use will result in the highest market value.

For example, a vacant, five-acre, commercial-zoned parcel of land on Madison Avenue in New York City would not be valued as vacant land, but as whatever its maximum use could have been, such as an office building.

At crossed purposes

There can be a serious conflict between the two guidelines when there is a partial taking, such as when a government takes a strip of a larger tract for a road widening, during the pendency of a tax assessment appeal on the larger property. The conflict can arise when the property's highest and best use happens to be its present use and condition.

In that scenario, a property owner is in the difficult position of claiming a low market value for the tax assessment proceedings and claiming a higher market value during the condemnation proceeding. When that happens, the taxpayer's team must perform an analysis to determine which proceeding will potentially result in the greatest benefit to the owner.

A good rule of thumb would be to withdraw the tax appeal and concentrate on the eminent domain claim. This is because for condemnation, the damage has occurred on a single date (the date of the taking). Tax appeals, on the other hand, are filed annually, and market values can change from year to year. A wise petitioner would proceed with a tax appeal only after the eminent domain claim is concluded.

The pandemic leaves affordable housing property owners vulnerable and searching for ways to reduce their property tax liabilities.

After a pandemic year that decimated rental incomes, owners of affordable housing properties should prepare to protest property tax assessments that overstate their liability.

As stay-at-home orders in 2020 forced businesses across the county to change their operations, a large portion of the labor force began to work from home. But many renters, including a large contingent of affordable housing residents, found themselves without jobs and struggling to pay rent.

Job losses and other issues related to COVID-19 adversely affected tenants and property owners alike, straining rental income while adding the cost of new safety procedures and equipment to landlords' operating costs. To reduce property tax liabilities and limit financial losses from the pandemic, it is now crucial for owners of affordable housing to correctly navigate procedures across jurisdictions and weigh all relevant valuation considerations for their properties.

Here are key areas for affordable housing owners to consider in arguing for a lower assessment.

Procedures have changed

The global pandemic transformed interactions between appraisal districts and property owners throughout the 2020 tax year. Many appraisal districts across Texas closed their doors to the public and shifted formal and informal meetings to a virtual setting to combat the spread of COVID-19.

As hearings approach in 2021, appraisal districts are expected to keep many of the pandemic-related practices in place. Telephone and video conferences will likely be the preferred format for hearings and informal meetings, but taxpayers should be prepared to appear in person should the jurisdiction require. Property owners can avoid procedural uncertainty by proactively communicating with the appraisal districts and being sure to meet requirements related to the protest process. Appraisal district websites can also be a helpful resource with regard to procedural guidelines.

Affordable housing performance suffered

The pandemic presented unprecedented challenges for the affordable housing industry. Many tenants lost income as result of job losses and experienced increased financial hardships. The federal government provided economic aid in the form of stimulus checks, which enabled some renters to pay partial or full rental amounts. As the pandemic ravaged on, however, stimulus checks ran out and many tenants ceased to pay rent, cutting into property owners' revenue. Nine out of 10 low- and moderate-income housing providers experienced a revenue decrease as result of COVID-19, according to a study from NDP Analytics.

While tenants' financial difficulties contributed to decreased property revenues, property owners also incurred increased expenses. Property owners were forced to invest in personal protective equipment, increase their cleaning standards and take other measures to ensure the safety of their employees and residents. Research from NDP Analytics also found that low- and moderate-income housing providers across the country averaged an 11.8% decline in revenue and 14.8% surge in operating expenses due to the pandemic. These additional expenses, combined with decreased revenues, created major hardships for many in the affordable housing industry.

Property tax valuation outlook

The Texas Property Tax Code provides two methods for protesting excessive property tax valuations: a market value remedy and an equal and uniform remedy. A market value claim argues that the assessment is excessive based on the three approaches to valuing commercial real estate: income, cost, and sales. Assessors and appraisers typically value an affordable housing property using the income approach. Assessors will gather market income, vacancy, and expense data to arrive at a net operating income, and then capitalize that using a market cap rate reflective of market performance. Taxpayers should evaluate the assessor's cap rate and argue for a more appropriate rate if needed.

Decreased net operating incomes at affordable housing properties in 2020 could result in lower 2021 assessments. When addressing valuation concerns with appraisal districts, property owners should provide evidence of financial strain such as concessions and reduced rent. Data of this sort provides insight to appraisal districts on the performance of a particular property or market and can aid in achieving a value reduction.

The Texas Property Tax Code also requires that properties be appraised equally and uniformly when compared to a reasonable amount of comparable properties. Affordable housing owners should be sure their properties fall within a similar range of values with other like properties on a square-footage basis. Assessors must consider the characteristics of affordable housing projects when choosing comparable properties. Valid comparable selections will allow for a true comparison that reflects the unique characteristics of this property type.

Address tax rates, too

Assessed valuations and tax rates are the two components that determine a property owner's tax expense in Texas. Disgruntled property owners often place the blame of a higher tax bill upon the assessor and forget to address the issue of tax rates.

Taxing entities determine their respective tax rates in the fall, once appraisal districts have certified their appraisal rolls upon completion of the administrative protest process. Property owners should not only protest their property taxes, but attend tax rate hearings and voice their opinions with elected officials to minimize their property tax expense.

Managing Property Taxes

COVID-19 strained affordable housing property owners throughout the past 12 months. Skillfully managing property tax expenses will be vital to the financial health of the real estate. The decision to appeal a tax assessment and partner with a knowledgeable property tax professional will be crucial to successfully reducing assessed values and navigating challenges in the pandemic's wake.

Property tax assessments show market-wide value declines for the first time in 25 years but fall short of reflecting taxpayers' true losses.

Insights into managing real property tax liabilities in the nation's capital.

After the tumult and disruptions of 2020, the last thing taxpayers need is another surprise. Our society craves predictability more than ever before, and commercial real estate owners want predictability in their property taxes. 

In the District of Columbia, commercial real estate owners keen to make their future expenses more predictable can start by familiarizing themselves with the full gamut of real property liabilities. In addition to the standard annual property tax, the District imposes a variety of charges on real estate that vary by the property's location, use and payment history. 

Managing these real estate charges can help a taxpayer budget for upcoming expenses and minimize the risk of incurring unplanned costs. What follows is a primer to help taxpayers manage real property tax liabilities in the District: 

Start with the basics 

The DC Office of Tax and Revenue (OTR) recently launched MyTax. DC.gov, a new taxpayer website intended to streamline the tax assessment and billing processes. This single portal offers insight into taxes on individual income, businesses and real property, as well as fees administered by OTR. 

The site features self-service tools that enable taxpayers to review and pay property tax bills online, view assessment histories, apply for tax relief benefits, request mailing address changes and submit mixed-use declarations, among other features. While this centralized system should help to organize the billing and payment processes, it offers little information about the District's fees and may leave owners still wondering: What are these charges? 

The BID tax 

Many commercial property owners in the District incur a business improvement district (BID) tax. The District defines a business improvement district as "a self-taxing district established by property owners to enhance the economic vitality of a specific commercial area." Each of the District's 11 BIDs assess a surcharge to the real property tax liability, which the District collects and then returns to the BID. Each BID dictates how it spends its funds, typically supporting the community with programs promoting cleanliness, maintenance, safety and economic development. 

The DC Code establishes BIDs and their geographic boundaries. These provisions empower each BID to establish its tax rates. How those taxes are calculated varies by BID. For example, an individual district may base its tax on the number of rooms in a hotel, a building's square footage and a percentage of the tax assessment value. Thankfully, these organizations often have robust, informative websites that can be useful resources for property owners. 

As with real property taxes, a property owner that fails to pay its BID tax on time and in full can incur penalties and interest charges on its tax account. Therefore, mismanaging a property's BID tax can lead to pricey consequences. 

Public space or vault rent 

To optimize the operation of an asset, many property owners rent-adjacent, District-owned space known as "public space." The District categorizes these offerings as either "vault space," which is below ground level; or above-ground "café space." Examples include outdoor café space, above or below-grade parking and areas for storage of utilities. 

The formula for calculating vault rent is Land Rate x Vault Area x Vault Rate. Therefore, changes in a property's taxable land assessment value will result in a change in the rental charge for associated public space. Unlike BID taxes, public-space rent is charged to the renter as a separate bill. This requires extra attention to avoid those pesky penalty and interest charges. 

Special assessments 

A variety of supplementary special assessments may arise to fund city-wide projects. Examples of these charges include a ballpark fee, Southeast Water and Sewer Improvement fee and the New York Avenue fee. The levy of these assessments is governed by specific criteria set forth in the related DC Code provision. 

Given the often-complex nature of the code, taxpayers may choose to consult a tax or legal professional to help navigate these less-common levies. 

Credits 

A credit on a property owner's tax account will likely come as a welcomed surprise, but the taxpayer should give these circumstances the same scrutiny they would give to unexpected charges. Understand that a credit is not free money, nor is it always an accurate designation. 

If a credit appears on the account, it will likely stem from a prior overpayment. This may reflect a reduction in tax liability that occurred after a bill was issued. Other possible causes include a DC Superior Court Refund Order, a dual payment from a third-party vendor or a prepayment of the full year tax liability on a first-half tax bill. 

Before enjoying the benefit of the lowered tax liability, it is important to verify this credit is justified. If the credit was wrongfully applied, a taxpayer will still be liable for the remaining balance. The District may issue a corrected bill for the outstanding amount, or the balance may appear on a future tax bill. A failure to remedy this balance can once again lead to penalty and interest charges. 

Penalties and interest 

The most unwanted surprise charges are penalties and interest. These charges can arise under several circumstances such as when the taxpayer has failed to file a yearly income and expense form with the District, or after missed, late or incomplete payments. 

Penalties and interest can cause a headache for taxpayers. The District will apply any future payment to penalties and interest before the account's principal balance. Therefore, it is easy for a small charge to cause a cascading liability if it is not timely addressed. In addition, while a taxpayer may petition for these charges to be waived, this process is often lengthy and the issuance of such a waiver is at the sole discretion of the OTR. 

The prospect of navigating these charges may seem overwhelming but it is a vital part of owning and managing real estate in the District. Therefore, it is best to learn the tax rules or consult with a local tax attorney who has experience dealing with these issues, as well as with the corresponding governmental entities. A knowledgeable expert can sort through this complicated web of liabilities, penalties and errors.

Find out why not all industrial properties deserve increased tax assessments, contrary to popular belief.

While some commercial property types struggled to stay relevant in 2020, industrial real estate seemed supercharged by the pandemic. This year, tax assessors are likely to use strong investor and occupier demand for some industrial properties to support significantly higher assessments for all industrial real estate. They may see this as a solution to make up for value losses in the hospitality, retail, and office sectors. That means industrial property owners should prepare for major assessment increases and begin building arguments to establish their properties' true taxable value.

E-commerce in perspective

If e-commerce was rising before 2020, it skyrocketed after the initial shock of the pandemic. The e-commerce share of total retail sales jumped to 16.1% at the end of the second quarter of 2020 from 11.8% in the first quarter and 10.8% a year earlier, according to the Census Bureau. As e-commerce grew, so too did industrial leasing demand, as online retailers secured spaces to process incoming goods and fulfill orders for shipment to consumers.

The e-commerce operations driving the surge in demand brought with them a list of demands to serve their logistical plans, however. Their preferences typically included locations close to major transportation corridors, proximity to their customers for deliveries, high ceiling heights and other traits necessary for handling the rapid growth of logistics-related technologies.

For 2021 industrial property tax appeals, it is important to understand that not all industrial real estate is equally suited to meet the demands of e-commerce operations. In practice, occupier demand that makes some properties more valuable will often lower the marketability and value of properties not fitting that demand. This, in turn, can affect a property's taxable value.

A Checklist for Appealing Tax Assessments on Industrial Property

The following are issues to consider in 2021 industrial property tax appeals:

Pick the right approach. There are several appraisal methods that assessors can use to value a property, but taxpayers should pay special attention in 2021 to the sales comparison approach. Though Texas is a non-disclosure state, meaning the state does not require a buyer to reveal the purchase price for acquired real estate, assessors have tools at their disposal to obtain or back-into purchase prices.

For tax year 2021, it will be important to note that although there may have been a few transactions, overall industrial sales volume generally declined from the prior year's numbers among the major metropolitan markets. In the second quarter of 2020 especially, the drop off in sales indicate that lenders and investors had to reevaluate the market and their underwriting assumptions.

For the sales comparison approach to value properties accurately, the properties and transactions used as evidence need to be comparable to the subject property. If that is not the case, calculations may place an unnecessary premium on the property.

For example, sales of warehouses with cold storage capabilities should not be directly compared to a conventional warehouse without a cold storage component. Thus, if an assessing jurisdiction raises an assessed value based on limited sales information, chances are the sale is not representative or comparable to the taxpayer's property. The taxpayer should consider raising this issue in their property tax appeal.

Consider property age and class. The industrial real estate sector serves a wide variety of uses that require special buildouts or designs that must be completed for the intended tenant to conduct their business effectively. For example, older, Class C industrial buildings tend to have smaller square footage and lower ceiling heights than more modern spaces. With the rising cost of transportation and emphasis on logistical efficiency, these attributes make Class C properties less marketable than newer, Class A or B industrial buildings.

According to CBRE, the warehouses built in 2019 are typically greater than 100,000 square feet and have ceilings that average 3.7 feet higher than warehouses built between 2002 and 2007. The increased space is primarily for more inventory and reverse logistics for returns. The newest buildings also feature more bay doors and parking space for large trucks. If the assessor is comparing properties and valuing a 2002-built warehouse the same way as the newer product without adjustments for class and age, the taxpayer may have an additional issue to raise in their appeal.

Location is critical. Location is becoming more important than ever to the tenant. Since land is more expensive the closer it is to the central business district of any city, the potential for using the space efficiently becomes more crucial as well. Assessors may increase the value of properties that are close to these markets.

E-commerce businesses demand locations that can speed last-mile deliveries to consumers. Proximity to transportation corridors is a significant advantage for tenants because it improves the timeliness of the supply chain. If an industrial property does not meet current demand because of its location, that may be an avenue for relief from increased property tax valuations.

Is rent paid, or deferred? Governments have deemed some industrial real estate tenants to be essential businesses during the pandemic, and this has limited the disruption of rent payments to certain landlords. During property tax appeals, it will be important to highlight the properties that suffered decreases in net operating income and occupancy, so they are not treated like the properties that saw no disruption in rent payments.

Owners of industrial properties may be able to fight and defeat the property tax increases potentially heading their way. Keys to winning assessment appeals will include following the industrial trends and being able to distinguish the taxpayer's property from the desirable properties that are trading, possessing evolving technology, being in the right location, andcollecting strong rents. 

Georgia taxpayers should start preparing arguments to lower their property tax assessments.

Few commercial properties emerged with unscathed values from the harsh economic climate of 2020. Yet Georgia and many jurisdictions like it valued commercial real estate for property taxation that year with a valuation date of Jan. 1, 2020 – nearly three months before COVID-19 thrust the U.S. economy into turmoil.

This means governments taxed commercial properties for all of 2020 on values that ignored the severe economic consequences those properties endured for more than 75% of the calendar year. When property owners begin to receive notices of 2021 assessments, which Georgia assessors typically mail out in April through June each year, property owners can at last seek to lighten their tax burden by arguing for reduced assessments.

The pandemic hurt some real estate types more than others, however, and with both short-term effects and some that may continue to depress asset values for years. For taxpayers contesting their assessments, the challenge will be to show the combination of COVID-19 consequences affecting their property, and the extent of resulting value losses.

The experiences of 2020 can serve as a roadmap for valuations in the current year and, in certain settings, in future years.

A three-pronged attack

COVID-19 can inflict a three-pronged assault on a commercial property's value, and taxpayers should explore each of these areas for evidence of loss as they build a case for a lower assessment.

Widespread losses. The first prong of the trident may be a drop in value stemming from an overall decline in the market. Like the Great Recession of 2008, the pandemic has reduced many property values by impeding economic performance in general.

Reduced income and cash flow, for example, can indicate reduced property value. Valuing the property with a market and income analysis approach can reveal this type of loss.

Reduced functionality. Is the property's layout or format less functional than models that occupiers came to prefer during the pandemic? In Georgia, functional impairments may have curable and incurable components beyond normal obsolescence. In other words, when changing occupier demand has rendered a property obsolete, there may be some features the owner can address to restore utility and increase value.

Adverse economic trends. Economic factors occurring outside the property can suppress property value. Georgia tax law recognizes that economic trends can reshape market demand and render some property models obsolete. This economic obsolescence can be short term while the economy is down or a permanent change.

Subsector considerations

Retail. Big-box stores, malls and inline shopping centers had already experienced a functional decline and an economic downturn, both of which accelerated as shopping habits changed during the pandemic. Big box properties were already becoming functionally obsolete as retailers reduced instore inventory requirements and shrank showrooms, which left little demand for the large-format buildings.

Moreover, outside economic factors such as declining instore sales, competition with ecommerce retailers, and high carrying costs have also undercut the value of these properties. The pandemic accelerated this decline, and it is unlikely there will be much, if any, recovery.

Hospitality. The pandemic has severely diminished travel and vacations, and hotel vacancies have skyrocketed. The income yield per room is declining. Operating costs have increased per visitor as amenities have been shut, curtailed or reconfigured. Many hotels have eliminated in-house dining and offer only room service.

The cost to maintain kitchen services is disproportionate to the number served. This decline is solely a product of COVID-19 and, over time, will revert to near normal. Some increased costs may remain elevated, such as extra cleaning supplies and labor to disinfect the property.

Office. COVID-19's effect on office buildings, especially high-rises, may be long-lasting. Fully leased buildings have seen less of a direct affect, but properties with significant unleased space are already hurting. Demand will diminish as more employees work remotely and companies consolidate with shared workspaces, motivated to reduce occupancy cost. This trend will produce both functional and economic effects on the value of office buildings.

Industrial. To a lesser extent, some manufacturing plants can suffer industry-specific economic consequences of COVID-19. Reduced travel has compelled airlines to reduce flights and sideline aircraft, reducing the demand for new and replacement aircraft. Less aircraft being built reduces the value of aircraft manufacturing plants, including the buildings that house them. Likewise, oil production, storage and consumption is down, due to reductions in leisure and business travel and commuting as more people work remotely. Excess capacity for drilling, storage and processing petroleum makes those facilities temporarily obsolete.

Multifamily residential. COVID-19 may have had little negative effect on multifamily complexes. During the pandemic, the supply of available housing on the market has contracted, driving up rents. As a result, apartments remain in high demand from renters and investors, although some areas may be overbuilt.

Despite high occupancy rates, properties may have non-paying or late-paying tenants. It would seem that yields per square foot may be higher, which would suggest increased property values for apartment complexes now. This is not always the case, however, and multifamily values must be considered individually.

Expect resistance

COVID-19 has also affected the mindset of taxing authorities, whose operating costs have remained the same or increased during the crisis. Taxing authorities will be reluctant to decrease tax revenue and will push back against property owners' arguments for reducing taxable values.

Just as individuals have taken personal health precautions against COVID-19, property owners must take precautions to protect the financial health of their properties from the virus' detrimental effects. All commercial property owners in Georgia should carefully examine assessment notices. Wise owners should strongly consider consulting with property tax experts to determine whether to file an appeal.

Valuation and procedural changes that were implemented in 2020 may have significant effects on owners' 2021 tax liabilities.

Expertly managing property tax liability is more important than ever in 2021. The COVID-19 pandemic pummeled both real estate and business personal property values in the past year, forcing local jurisdictions to overhaul procedures that had been in place for decades. Many of those procedural changes will likely continue this year as assessments finally register the pandemic's full effect. Understanding the procedural changes made by local jurisdictions, and new valuation considerations for both real and personal properties, will be key. 

New Procedures Volatile 

When the pandemic hit, neither appraisal districts nor property owners knew how long the crisis would last. Most appraisal districts closed their doors to the public and quickly converted all informal and formal meetings to telephone or video conferences. Moving into 2021, much of that uncertainty remains. Most jurisdictions will likely continue to rely upon virtual formats for this year's informal meetings and hearings, which generally begin in April and continue throughout the summer. Property owners should be prepared, however, for procedural changes that may be implemented as conditions change. Communication with assessors will be vital, and taxpayers should make sure to provide all requested documentation in a timely manner. Communicating early and often about the valuation and protest will ensure no deadlines are missed and no procedural changes are overlooked.

Managing Real Estate Taxes 

While the fundamental valuation and appeal process for real property will remain the same in Texas, procedural changes initiated in 2020 will likely continue in many appraisal districts. Assessments will reflect the property's value as of Jan. 1, 2021, and notices will likely be mailed in mid-April as usual. The deadline for property owners to protest their 2021 real property values will be unchanged at May 15 in most cases, or 30 days after receipt of the notice of appraised value. 

Property owners can expect the continued option to protest assessments online, as well as telephone and video conferencing options for hearings. While these procedures were enacted and refined in 2020, the combination of virtual hearings and a potentially increased volume of protests in 2021 may push hearing schedules past their typical end (in June or July) and into the fall.

A Real Impact on Values 

Undoubtedly, 2020 was a unique year for property performance. Some property types sustained disastrous effects from the pandemic and stay-at-home orders while others fared the year well. Because Texas' valuation date for the current tax year is Jan. 1, 2021, many valuation methodologies will rely upon a property's performance over the 12 months preceding that date to inform their value metrics. 

Shopping centers, restaurants, theaters and hotels are among those properties that suffered greatly in 2020. Sadly, many closed their doors for good after struggling to perform this past year. Hotels saw revenue dip as much as 80 percent. Restaurants and theaters experienced government-ordered closures for most of the year, and capacity restrictions for the remainder. 

The resulting drag on potential rents, occupancy and cap rate assumptions has pushed down values. Property owners should see some recognition of value decline in these most-affected property groups, but to what extent remains to be seen.

Business Personal Taxes 

On the business personal property front, we expect deadlines to mirror the statutory language for filing exemptions and rendition reports, which list owned machinery, furniture, equipment, vehicles, merchandise and other business personal property. Due to COVID-19, many large appraisal districts extended the rendition deadline for all taxpayers in 2020, but we expect the typical formal extension request process to be back in place for 2021. All extension requests must be made in writing to the appraisal district before the statutory deadline of April 15. An approved extension allows the taxpayer an additional 15 to 30 days past the statutory deadline. 

Taxpayers with significant business personal property investment need to thoroughly analyze how COVID-19 limited or otherwise compromised the usage of their income-producing assets. Assessors and appraisers rely almost exclusively on the cost approach to value business personal property. In this climate, however, the simple depreciation they normally apply will not capture pandemic-related losses to produce an accurate market valuation.

To account for the loss in value, owners should consider developing an additional obsolescence factor to apply after typical depreciation. The Texas Property Tax Code allows for the inclusion of all forms of depreciation including economic obsolescence, which occurs when factors or trends occurring outside the property reduce its value. 

Each owner will require their own, unique obsolescence factor to measure economic impact. There are many ways to calculate an economic obsolescence factor, depending on the taxpayer's core industry. Analyzing production versus capacity is most often beneficial for manufacturers, for example, while income metrics are better suited for some retailers and medical providers. 

We recommend also doing a lookback for at least three years to properly illustrate the COVID-19 impact. The property tax team must truly understand the business in order to arrive at the proper factor.

What About Tax Rates? 

In addition to assessed value, the second piece of a property owner's tax liability is the tax rate. Taxing entities set their tax rates in the fall, after appraisal districts determine property values. 

Should 2021's overall property valuations decline, property owners should not expect an exactly equal decline in their tax liability. If the total tax levy falls significantly due to the valuation factors affecting property values as of Jan. 1, 2021, it is possible — and maybe even likely — that tax rates will rise. 

No one can predict tax rates with certainty, but owners would be wise to budget conservatively for anticipated tax liabilities. A 40 percent decline in revenue may not translate to a 40 percent decline in the assessed property valuation or tax liability for 2021.

Partnership is Key 

Navigating property taxation in a COVID-19 world can be overwhelming. It can be particularly challenging to stay on top of frequent procedural changes, and to understand the sometimes unique valuation metrics affecting real and business personal property. Partnering with an experienced property tax team can give owners peace of mind in a tumultuous year.

Commercial real estate owners should build arguments now to reduce fair market value on their properties affected by the pandemic.

The uncertainties and changes brought on by COVID-19 have had far-reaching effects on all facets of daily life. As commercial property owners position themselves to weather the storm, it is crucial that taxpayers most affected by the virus do what they can to control their property tax expenses.

The issues they face are complex, from pre-crisis valuation dates and the need to quantify value losses, to cash-strapped taxing entities that will be reluctant to compromise on values. Taxpayers will need creative, innovative approaches to successfully protest their assessments and see their cases through to having their taxable property values reduced.

Ohio mulls relief

Assessors in Ohio and many other states value real property as of Jan. 1 of the tax year under protest, known as the tax lien date. Other than when a property has recently sold, assessors and courts seldom consider factors occurring after the tax lien date in a property tax case.

For example, the current property tax filing period in Ohio relates to tax year 2020, and real property is required to be valued as of Jan. 1, 2020, for that tax year. That means valuations for 2020 in those jurisdictions typically ignore changes to a property's value that occurred during the COVID-19 pandemic.

Ohio is the only state considering legislation that would require taxing authorities to recognize the effects of COVID-19 on real estate values where the impact occurred after the tax lien date. Depending on where a property is located, taxpayers will need to consider all options if their jurisdiction does not allow for consideration of the impact of COVID-19 in a tax challenge this year.

When it comes to deciding whether to challenge a property's assessment, there are many factors to consider. If the property recently sold, analyze the sales price to indicate the actual market value of the real estate deducting any non-real estate values. Then factor in the pandemic-related issues.

The taxpayer may need to order an appraisal, whether to support their own complaint or in fighting a tax increase complaint filed by a school district. These circumstances are more likely in some jurisdictions than others; experienced local counsel can help the taxpayer decide whether, and when, to obtain an appraisal.

At times, taxing authorities or a court may require testimony from a property owner or other individuals associated with a property. Many taxing authorities are allowing testimony via popular video conferencing applications, which may make it easier than in the past to seek the involvement of witnesses for a hearing.

Variations by property type

Market trends affecting specific property types and operations will provide evidence to support many assessment protests. Hotels, for example, have been directly impacted by COVID-19, therefore data for hotel properties must be carefully evaluated in light of current events.

Compile historical information such as 2020 financials as soon as possible, as well as recent occupancy reports. Hotel owners must be prepared to testify along with their expert appraisal witnesses.

First-hand knowledge of the devastating effects of COVID-19 will be an important component of a case. While Ohio courts in the past have generally disfavored the discounted cash flow method of valuing commercial properties, expert witnesses may need to explore, use, and be prepared to explain that option in a post COVID-19 world.

It is important to note that COVID-19 has not affected all property types in the same manner. The pandemic devastated many hotels, restaurants, and certain retail and office properties, for example. On the other hand, other properties such as industrial properties serving ecommerce operations have fared well.

How trends relating to property type translate into a potential reduction in a property's fair market value depends on what a particular jurisdiction requires from taxpayers to prove their case. Property sales data from 2020 to the present will become an important component of any property tax review, given the events of the past several months. Discussions with an appraiser familiar with local data and trends will be critical.

Even if a taxpayer cannot reference COVID-19 effects in a challenge filed this year, they should consider effective strategies now in preparation for future property tax issues related to the pandemic. Most likely this will involve a long-term approach to contain property taxes, while addressing short-term needs as best as possible. A case settlement may address several tax years, giving the taxpayer some certainty and planning capabilities for the future.

Additionally, a plan for how to approach a case often depends on the regional property tax landscape. Because of this, achieving a good outcome in the future may depend on how the taxpayer prepares their case from the outset, affecting decisions such as whether to have an appraisal and which parties should testify.

The best means to address recent change and today's uncertainties are to remain adaptable and to begin forming effective case strategies as soon as property tax expenses become available for evaluation.

Local and state governments are expected to see annual revenues decline by between 4.7 percent and 5.7 percent over the next three years, excluding fees to hospitals and higher education, according to Brookings. But most vital government functions continue, and soon, counties will assess property values to prepare property tax bills for 2021. They expect timely payment. They also should expect a flood of appeals to lower property values, says Linda Terrill, president of the American Property Tax Counsel and a partner with the Property Tax Law Group, who spoke with SCT contributing editor Joe Gose.

How do you anticipate 2021 property tax assessments unfolding?

The good assessors know that a decline is coming and will try to make some serious examinations to see whether they need to come in at a different number from the prior year. My cynical view is that when there is an increase in value, they're very quick to notice it but if it's a decrease, there's a lag before they notice it.

It sounds like you expect a lot of appeals. What can property owners do to prepare for one?

Planning is the key to everything. You need to find out the state requirements for when you can file and who can file to make it legal — some states require corporations to be represented by legal counsel, some don't – and you need to know the state's definition of market value. You also need to get ahead of the curve and begin interviewing professionals who can help you, especially appraisers, before all the good ones are representing others. It's best to find an appraiser that does property tax or condemnation work.

What is the most important element in an appeal?

The highest and best use analysis. A lot of appraisers would confess that they go into an analysis thinking that the current use is indeed the highest and best use, but I don't think they can assume that anymore. Property owners need to tell their appraisers to really do the work and math because as of Jan. 1, 2021, the highest and best use of a shopping mall charging $20 per square foot in rent might now be a fulfillment center charging $5 per square foot. Or maybe it's an adaptive reuse that includes converting part of the mall to office or adding apartments.

How might declining rental rates influence an appeal?

Shopping center owners can make a terrific argument that if they had to lease space on Jan. 1, 2021, the current contract rent would have no reflection at all on market rent. There are an awful lot of leases being renegotiated and amended that will have to be considered, even though they might not get done before Jan. 1. Property owners need to put a trail of paperwork together to tell a good story. That means keeping correspondence with tenants to show the back-and-forth of what's happening and whether or not they are staying.

Is there anything property owners can do to reset to a more appropriate value prior to an appeal?

The best bet is to see if you can work something out early, particularly if you're a shopping center that is historically a top provider of tax receipts in your jurisdiction. You might want to start talking to the county assessor now and see if you can get a better result when the values come out in 2021. I don't know of any assessor that wouldn't welcome the opportunity to have a legitimate discussion about what's happening and come to a number. Many states also have a local-level appeal that you go through before going to court or an administrative body. In either case, you may have to settle for something less than what you would like, but if it helps keep you afloat, then it's a good outcome.

How long does a typical appeals process take?

If you're in [my state of] Kansas and want a hearing in 2021, you're not going to get one anytime soon because we haven't had any in 2020 yet. Thousands of cases are backed up, and I think there are many states in a similar situation. Counties are going to want to hire more people to handle these cases, but at the same time, they're going to be laying off people because of budgets. For all those reasons, it's going be impossible to come to a resolution quickly.

COVID-19, wildfires and civil unrest all threatened property values and tax revenues in 2020, notes Foster Garvey attorney Cynthia Fraser.

Across America, 2020 transformed the urban core. Hotels sit vacant, deprived of business by travel that has been all but suspended. Restaurants under occupancy restrictions struggle to break even or have closed for good where winter weather precludes outdoor dining. In some locations, plywood sheets encase office and commercial buildings for protection against vandalism. In my own city of Portland, Ore., walking through parts of downtown is like walking through a ghost town of shuttered businesses that once teemed with commerce.

Suburban and rural properties have sustained similar impacts, while fires have ravaged many communities. With skyrocketing unemployment in many states, governments have set eviction moratoriums, and the number of tenants not paying rent continues to grow. Landlords may begin to file for bankruptcy protection in increasing numbers as their own bills—including property taxes—come due.

How long it takes for cities to bounce back from the events of 2020, and for property values to recover, will depend upon each community's economic vibrancy. Because property tax is a state tax, any relief from this tax burden depends upon each state's statutory date of value and whether its tax law contains a force majeure clause, which frees a party from a contract's obligations when an unforeseen event prevents their performing its terms.

MATTERS OF TIME

Most states value property as of Jan. 1 for taxes due later in the same year. Thus, in most jurisdictions a property's taxable value for the recent tax year reflects what was known or could have been known about the property and market conditions as of Jan. 1, 2020.

Lockdown for COVID-19 did not begin in most states until March 2020. The fires that devastated forests, agricultural land and communities across that nation took place over the summer and fall. No crystal ball predicted these events, nor the catastrophic fallout and snowballing impacts on property values.

Many contracts contain force majeure clauses. In most states, a force majeure law provides an adjustment to the market value for property taxes when there was a catastrophic event that destroyed or damaged property during the tax year. These statutes typically provide for an adjustment based on the event's timing, and in most states recognizing force majeure, it is critical to appropriately report the property damages to receive this retrospective reduction in taxable property value.

Some states, including Oregon, have passed legislation extending the deadline to report property damage from fire that will allow for a reduced real market value for a portion of the tax year.

Force majeure laws do not typically recognize a decline in property value due to a pandemic or the economic effects of boarded-up city blocks. Any records tracking the decline of property values will help taxpayers address novel valuation issues for this coming tax cycle. The long-term effects of these economic forces will weigh on property values for years and to varying degrees.

PREPARE TO PROTEST

Assessors will vigorously fight the taxpayer's request for a reduction in taxable value when their coffers are already low due to the loss of other tax revenues. For apartment landlords, it will be important to track nonpaying tenants, particularly in the states and cities that have enacted laws preventing evictions for nonpayment of rents. Retail landlords should track local market conditions and news of business closures that result in stores and restaurants going vacant, as that information will be important in supporting tax appeals this coming year.

Perhaps the largest unknown in the market is what will happen to the office sector. Office workers the world over have adapted to remote working. Zoom, Microsoft Teams or Webex have replaced conferences and board meetings, client visits and even many court hearings. The need to live close to a downtown office, or even in the same city, has diminished. Businesses are rethinking the need to staff their offices full time, and workers may be reluctant to commute to an office when they can effectively do their job at home.

Multiple factors will shape the real market value of properties this coming year. In 2020, taxpayers may have struggled to pay or protested tax liabilities that were based on values and valuation dates which preceded the crises that were to come that year.

By contrast, the uncertainties of the pandemic and its economic fallout will be tied to what is known as of Jan. 1, 2021. Property values across the nation will surely be affected, and this time around, taxpayers will be able to appeal assessments that fail to reflect the detrimental effects that many of the past year's events have inflicted upon their property's market value. Be sure to have the facts, figures and experts to deliver this information lined up in order to achieve a successful property tax appeal.

Closely examine your 2021 tax assessment to ensure your property's valuation isn't excessive.

   E-commerce was here to stay even before the pandemic devastated small businesses and placed an even greater premium on technology. In the changed landscape, lowering occupancy costs by reducing property taxes is one of the most important steps businesses can take to remain competitive.

  Stay-at-home orders still prevent many shoppers from visiting their favorite brick-and-mortar stores, while fear of contagion exacerbates consumers' reluctance to shop in person. Regardless of customer traffic, however, retailers still incur fixed costs including insurance, enterprise software, property taxes and, arguably, rent.

  Online-only retailers' occupancy costs are much lower, making it difficult for small brick-and-mortar businesses to compete. Put differently, sales taxes decline with reduced sales but property taxes do not. Landlords and tenants in triple net leases often fail to examine property taxes, but the survival of both may depend on reducing this cost.

  Other costs such as insurance and the enterprise software needed to run the business generally lie beyond a small business' control and do not diminish with reduced business volume. The active 2020 hurricane season certainly has not reduced insurance costs. During the pandemic, some landlords have deferred or forgiven rent, but this forbearance provides no long-term solution to the challenges e-commerce poses.

Mounting pressures

  The threat that high ad valorem taxes pose to pandemic battered small businesses is compounded by, and interrelated with, the e-commerce threat. Small businesses face enormous challenges in competing online with major brands such as Amazon and Wal-Mart, which command a far greater web presence than small mom-and-pop retailers.

  E-commerce's challenge to traditional retail will not end with the pandemic. The bulk of retail sales still occur in stores, with online purchases peaking in the second quarter of 2019 at just 16% of total U.S. retail sales, according to the Commerce Department. That percentage slowed to 14% in the third quarter.

  COVID-19 has accelerated the trend to "Buy Online, Pick Up In Store" (BOPIS). Pre-pandemic, BOPIS offerings were already growing as shoppers used it to avoid instore browsing time and shipping charges. A 2018 study reported 90% of surveyed online shoppers stated high shipping fees and home delivery longer than two days would likely deter them from completing an online purchase. Even before the pandemic, Amazon's rapid delivery model was pressuring conventional retailers to compete by accelerating shipping times.

  BOPIS allows retailers to blend online and in-store customer engagement while offering a more convenient way to shop. COVID-19 accelerated this trend as shoppers sought to minimize interpersonal contact during store visits. Retailers, however, need to be certain that applicable restrictive covenants permit BOPIS, since shopping centers often limit tenants' right to use common space. Further, traditional methods of valuing properties for tax purposes struggle to recognize and separate the intangible and untaxable value of web presence from the value of a physical location that serves as a pick-up point.

  Black Friday and Cyber Monday 2020 illustrate the evolving relationship between brick-and-mortar stores and e-commerce. RetailNext reported foot traffic to physical stores on Thanksgiving through the following Sunday decreased by 48% from 2019, while spending per customer increased more than 36%.

  Mall traffic tracker, Sensormatic Solutions, concluded that online ordering and social-distancing restrictions made shoppers more "purposeful" on their Black Friday trips. Adobe Analytics reported that Black Friday saw $9 billion in U.S. online sales, a nearly 22% increase year over year that made it the second-largest online spending day. Cyber Monday 2020 brought the largest shopping day in American history with $10.8 billion in volume, a 15.2% increase over 2019, Adobe reported. Adobe also noted that Black Friday curbside pickup increased 52% year over year.

Shared interests

  Landlords and tenants must recognize the mutual harm of high occupancy costs and guard against unwarranted property taxes as local governments seek to shore up their finances. Every nickel counts when retailers are under economic pressure just to keep their doors open. Years of remaining lease term is of cold comfort to a landlord whose tenant is forced to close by reduced revenue and high occupancy costs.

  Some short-sighted landlords ignore the property tax burden placed on their triple net tenants until a renewal is imminent since the landlord's costs are not directly impacted.  Where possible, a good lease on multitenant properties will address tax challenges and discourage taxes from being viewed as a mere pass-through expense. Further, prudent landlords should help reduce tax costs and avoid being forced to negotiate reduced rent to keep small businesses operating. Most leases do not include a provision permitting tenants to challenge ad valorem property taxes. Similarly, many state statutes only permit property owners, not tenants, to challenge taxes.

  Most assessors have not yet recognized COVID-19's impact on retail stores, primarily because the valuation date for most properties preceded the pandemic's full impact on retail. That will change in 2021 in many jurisdictions. Similarly, the trend toward BOPIS will increase the intangible value of online presence, generally not subject to ad valorem taxation, and decrease the importance of physical locations.

  COVID-19 is pressuring local governments to increase the property tax burden on small businesses. A recent survey found that municipal revenues are down 21% while expenses have increased 17% amid the pandemic. The survey reported 45% of mayors expect to see dramatic budget cuts for education, while at least one-third expect to see drastic cuts in parks and recreation, mass transit and roads. Only 36% of mayors expect to see a replacement of the businesses shuttered due to COVID-19.

  High property taxes will only exacerbate the municipal revenue problem. A short-term remedy to municipal finances, higher property taxes, risks the permanent closure of many small businesses and increase the burden on remaining brick-and-mortar retailers. Failing to address the problem will only accelerate the decline of physical stores and eliminate their local jobs and taxes.

Owners in North Carolina must satisfy legal tests in arguments for reduced taxable valuations.

   Notice of a commercial property's revaluation to an increased taxable value can deliver a shock to the taxpayer. Although actual tax liability will depend on the completed valuation, new budgets and a tax rate that is still to be set, the taxpayer fears that an inflated value will result in an unfairly high property tax bill.
The typical taxpayer response is to assert the new value is too high, particularly for the larger assessment increases. The assertion alone, however, is not enough to change the valuation. While many jurisdictions have different burden of proof statutes, under North Carolina law, the onus is on taxpayers to prove specific criteria meriting a reduced assessment.
   Unfortunately, the state's valuation practices set the stage for assessor mistakes and inaccurate valuations. Unlike many jurisdictions, North Carolina only requires that real property subject to taxation be revalued every eight years, although recently most counties have opted to revalue every four years. In light of dramatic property value swings over the past decade or two, however, these lengthy gaps between valuations often result in significant increases, with assessments spiking by as much
as 40 percent.
   Undertaking a county-wide real property revaluation is a behemoth project for any taxing authority. Countless hours of factual investigation, analysis, and number crunching go into the process. Those involved are performing a necessary public function and do their best to get it right.
   Given the scope of a revaluation, lawmakers have set limitations to discourage taxpayers that simply disagree with the new assessment from demanding a full appeal and hearing based solely on the merits of the value. Aside from the time deadlines in the appeal process, a significant governor on the appeal process in North Carolina is the burden of proof.

Proof vs. persuasion
    In North Carolina, tax assessments are presumed correct. The State Supreme Court spelled out this premise in a 1975 case involving AMP Inc.'s appeal of the taxable valuation assessed on inventory stored at a Greensboro facility.
    In finding that AMP failed to prove its case, the Court encapsulated the burden of proof when a taxpayer attempts
to rebut the presumed correctness of an assessment. This is a presumption of fact that may be rebutted by producing evidence that tends to show that both an arbitrary or illegal method of valuation was used and that the assessment substantially exceeded the true value of the property.
    A taxpayer appealing an assessment must come forward with evidence tending to show both of these conditions: that the method used to establish the assessed value was wrong, and that the value derived from that method was substantially greater than the true value (the assessed value was unreasonably high).
   The burden is not one of persuasion but one of production. In layman's terms, the burden is not to persuade the decision maker that the taxpayer's opinion of value is correct and the assessor's is wrong. Rather, the taxpayer must show simply that there is evidence both that the assessor used an incorrect method in its appraisal, and that the resulting value is substantially greater than it should be.
   Once the taxpayer has produced evidence to rebut the presumption of correctness, the burden of coming forward with evidence shifts to the county. The assessing entity must establish that its method did, in fact, produce true value; that the assessed value is not substantially higher than called for by the statutory formula; and that it is reasonable. The latter is a burden of persuasion, meaning the assessor must convince the decision maker that it applied a correct method and arrived at true value.
   The terms "arbitrary" and "illegal," which the Court used in AMP in referring to the taxpayer's burden of showing the assessor used an improper method, sound a bit harsher than they need be. The courts simply hold that a property valuation methodology is arbitrary or illegal if it fails to produce "true value" as defined by tax law in General Statute 105, Section 283. That section defines true value as meaning market value. Market value is the price estimated in terms of money at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all the uses to which the property is adapted and for which it is capable of being used."
    A variety of methods have been found to be illegal or arbitrary, such as failing to consider the effect of obsolescence in the face of testimony of obsolescence and relying only on the cost approach to value income-producing property. A tax professional will be knowledgeable of many other examples.
   Given the burdens inherent in challenging assessments, a taxpayer planning to appeal its assessed value needs to be prepared to assemble and present information supporting its value opinion. In addition, the taxpayer should obtain and understand the taxing authority's method of arriving at the assessed value, in order to challenge that method as may be appropriate.
   At the local level, taxpayers have traditionally focused arguments on value alone, but, as an appeal reaches higher levels, the burden can become a critical evidentiary obstacle to overcome. Failure to get over this initial hurdle can result in dismissal of the appeal without the actual assessed value being considered on its merits.

Leaders from five central appraisal districts share how COVID-19 drove procedural changes, some of which may be here to stay.

In early 2020, the rapidly unfolding pandemic threatened to derail Texas' property tax assessment and appeal process. 

With stay-at-home orders being issued at the same time that appraisal districts were sending out initial values for 2020, uncertainty cast doubt on how the process would proceed, or even whether it would proceed at all. Taxing entities were concerned with revenue impacts, and taxpayers were concerned about their ability to pay.

Every year, Texas launches the property tax cycle every Jan. 1 with a revaluation of property. In most jurisdictions, taxpayers expect to receive notices of appraised value sometime in April, with the deadline for protesting the appraised value typically falling in May. Under normal circumstances, these dates begin the property tax protest cycle for the year.

On March 31, 2020, however, the "typical year" quickly became anything but.

Appraisal districts faced the nearly impossible task of navigating an unprecedented scenario with limited time and resources. Their success in maintaining a functioning appeals process is a testament to the professionalism of the state's chief appraisers and personnel and to the fundamental strength of Texas' property tax system.

We queried chief appraisers and commercial supervisors from several appraisal districts about their experiences from the past year and their expectations for the property tax protest process in 2021 and beyond. 

Their observations provide not only a summary of their responses to the crisis, but also offer a blueprint for a successful appraisal and appeals system.

Popp Hutcheson: What were some initial challenges for you and your personnel when the stay-at-home orders were first announced?

Michael Page, Director of Appraisal, Hays Central Appraisal District: "When the stay-at-home orders hit in Hays County, we were just a few weeks away from our scheduled date to send notices. Our first challenge was to complete the notice process and simultaneously ensure the majority of our staff could work from home."

Scott Griscom, Assistant Chief Appraiser, Bexar Appraisal District: "Waiting on guidance from state officials with regard to the 2020 reappraisal effort pushed back our mailing dates for notices… The delay in mailings pushed back the protest deadline for all properties this year."

Jack Barnett, Chief Communications Officer, Harris County Appraisal District: "The Harris County Appraisal District was faced with two major challenges that resulted from the pandemic – avoiding transmitting the diseases in the building and social distancing."

Popp Hutcheson: Once it was clear the process was not returning to "normal" in 2020, what were the largest challenges in moving forward with protests?

Brent South, Chief Appraiser, Hunt County Appraisal District: "Logistical matters were the biggest challenge. Coordinating remote hearings and scheduling panels, conducting hearings remotely or telephonically/videoconferencing."

Ken Nolan, Chief Appraiser, Dallas Central Appraisal District: "Notices were mailed one month later than normal. No in-person, informal meetings with appraisers were allowed. One-member ARB [Appraisal Review Board] panels were used, and no in-person hearings were held until after certification. All hearings during the summer were by telephone."

Michael Page (Hays Central): "Our next challenge was to devise a way to conduct hearings if we were unable to reopen the office. My staff went to work investigating how to do this, starting from scratch as we had never conducted virtual hearings before."

Jack Barnett (Harris County): "Within approximately 60 days, the creation of virtual hearings went from an idea to reality – through development, which included submitting evidence; writing the instructions for appraisers, the ARB members and property owners; testing; and getting the instructions to the property owners."

Popp Hutcheson: What were some major successes from the 2020 property tax protest process?

Jack Barnett (Harris County): "The major successes were keeping employees healthy and employed and keeping the virus out of the building… Another big success was the development of virtual meetings with appraisers and ARB hearings. Even with a record number of protests this year, the ARB turned over the appraisal records for certification in August so the district could get the appraisal rolls to the jurisdictions."

Ken Nolan (Dallas Central): "Certifying the appraisal roll during the summer, successfully implementing the 'Tax Transparency Website' on time and limiting the spread of the virus."

Brent South (Hunt County): "Having the ability to provide the taxing units (with) a certified estimate was a major success. Without this most CADs would not have been able to provide entities a timely appraisal roll."

Scott Griscom (Bexar): "We found that working remotely with agents and the public proved to be far more efficient than we had ever dreamed… Even though we sent notices later, we were able to certify at over 90% complete on July 25."

Popp Hutcheson: Do you expect any of the procedural changes to stay in place in 2021 and beyond?

Ken Nolan (Dallas Central): "We will once again limit in-person informal meetings with appraisers and stay focused on online protests and telephone meetings to resolve protests. We will probably revert to in-person hearings, since it allows many more hearings to be scheduled each day."

Scott Griscom (Bexar): "We fully intend to continue to offer appearance at the ARB via Zoom as well as telephone and electronic meetings/hearings that have been met with favorable comments from owners, agents, and staff alike. We will continue to expand the online protest option for nearly all properties and encourage the use of it to resolve protests as well. We plan to stay closed to the public for the foreseeable future due to the upswing in positivity rate experienced within the community at large."

Jack Barnett (Harris County): "We will continue to offer and improve the virtual meetings and give property owners more options to work with the district from their homes or other off-site locations."

Michael Page (Hays Central): "Feedback from property owners shows that many like the ability to attend a video conference hearing without actually traveling to the district office. I foresee us continuing to offer this option to owners in the future as a way to provide improved customer service."

Moving forward
Along with the challenges COVID-19 forced upon the property tax system, appraisal districts discovered tremendous opportunities to innovate and take advantage of their successes in adapting to change. The efficiency with which appraisal districts revolutionized processed that had been in place for decades - in a significantly short time - is commendable.

And moving forward, the procedural transformation we witnessed in 2020 will continue to redefine the working environment within the property tax system.

During the pandemic, landlords and tenants need to track and document all issues affecting net
operating income to help with the property tax valuation process.

With property taxes comprising a significant portion of the real estate operating budget at most companies, both tenants and landlords need to understand how trends sparked by COVID-19 can impact their property tax valuations.

The pandemic has spurred governments to impose unprecedented restrictions on office capacity and fueled widespread uncertainty among companies that own or lease office space. Organizations are asking if, when, and how they will use their offices in the months ahead, and are scrutinizing expenses to reduce costs.

Many businesses are reevaluating their space requirements after adopting work-from-home initiatives, while greater familiarity with Zoom and other applications that support remote training and online collaboration has firms reconsidering their ongoing need for conference or meeting space. It is essential for real estate decision makers to monitor the effect of such trends on taxable property values.

Office demand evolves

In the early 1990s it was common for companies to occupy 350 square feet of office space per person. This requirement changed as some businesses sought to maximize density and encourage collaboration.

In a COVID-19 world where social distancing precludes density, many companies are limiting the number of employees returning to the workplace. Some companies have adopted permanent work-from-home policies. If this trend continues, office tenants may renegotiate leases to occupy smaller spaces, or decline to renew.

Taxpayers working with assessors need to understand renewal probability, which measures the likelihood of a tenant renewing their lease during the holding period. Before the pandemic, renewal probability in a given market may have been 80% to 90%, while a post-COVID renewal probability could well be 50% or less.

Because assessors typically value property annually, they seldom consider renewal probabilities. Given the uncertainty of a pandemic, however, property owners need to discuss renewal plans with any tenants that have leases expiring within the next twelve months, and then share that information with assessors. If there are a significant number of tenants at risk of vacating, and this is a trend that is being observed in the market, the assessor may need to adjust the capitalization rate used in the income approach to value the property.

Adjust assumptions

Owners of office buildings operating at a stabilized occupancy level for their market must work with assessors to evaluate and analyze their vacancy risk. Buildings that lack stable occupancy as of the valuation date will face additional challenges as the pandemic continues.

When working with assessors, owners must properly forecast an appropriate absorption period for their vacant office space, in addition to projecting appropriate costs to build out spaces for occupancy. With the volume of office space offered for sublease increasing at a record pace across the nation, and often at below-market rental rates, taxpayers and assessors must consider an additional layer of competition that could create downward pressure on rental rates for direct office space. An office building that may have reached stable occupancy in 12 months in a healthy real estate market could now require 24 to 36 months to stabilize.

COVID-19 has also ushered in new health and safety measures that office owners and operators may be required to address when building out office space. Touchless entry systems, improved HVAC and filtration, and antimicrobial construction materials are just a few build-out responses companies are evaluating to bring workers back into the office safely.

If these additional costs become standard, they must be considered in a lease-up analysis. Furthermore, these calculations must include any additional time needed to complete build outs at a time when construction crews across the nation are operating under their own COVID policies.

Office protocols will likely continue to evolve into 2021. That makes it important for users of office space to save all documentation that may have a bearing on the property's net operating income. This includes rent relief agreements, renewal information, relocation requests, lease terminations, build out costs and other records to help ensure the assessor can properly consider all factors affecting the valuation for the upcoming tax year.

For the next few years, office space will remain at risk for declining values at least until a vaccine can be developed and properly administered across the nation. In this challenging period, it will be critical to ensure that assessors appropriately weigh all relevant documentation when selecting metrics in property tax valuation models.

Here's what investors should know before buying or developing in the Steel City.

Over the past decade, Pittsburgh has been named the most livable city in the continental U.S., a hipster haven, a tech hub and other trendy titles. Publications laud the city's affordable housing stock in a stable real estate market, access to the arts in an established cultural community, and world-class healthcare and higher education that place the Steel City at the forefront of medicine and robotics.

This attention has drawn real estate investors to submarkets well beyond downtown Pittsburgh's Golden Triangle. Even in the midst of the pandemic and the economic uncertainty that has come with it, a surprising amount of new development has continued in the region.As investors from outside the region consider investing in this real estate market, they should be aware of idiosyncrasies and pitfalls lurking in Pennsylvania tax law.

Welcome, Stranger

As in most states, assessors in Pennsylvania cannot independently change a property's assessment upon its transfer. However, Pennsylvania lets local taxing districts appeal assessments and request value increases, which they often do following a sale. Locals call this the "welcome stranger" tax.

"One of the most common reactions I hear from our out-of-state clients who are new to this market is disbelief that school districts can appeal assessments," says Sharon F. DiPaolo, Esq., the managing partner of Siegel Jennings' Pennsylvania property tax practice. "Of course, in most states that's called a spot assessment, but in Pennsylvania it's just another appeal."

In fact, local school districts (which take the largest piece of the property tax pie) filed more assessment appeals than property owners in 2017-2019, according to The Allegheny Institute for Public Policy data. "The most difficult part for buyers is accurately estimating what is obviously a large part of a property's value equation," DiPaolo explains. "Buyers can budget for the legal costs of defending against an appeal by the government, but it's much harder to underwrite the real estate taxes when they can't know where the assessment will eventually be set. We have seen many investors choose not to enter this market because of the uncertainty."

Allegheny County in particular is unusual in that it has a March 31 assessment appeal deadline, and Pennsylvania uses the filing date as the effective date of value for assessment appeals.This means that properties already under appeal for 2020 should be valued as affected by the early fallout from COVID-19, and 2021 appeals will have to consider the pandemic's continuing impacts on property values.

Understanding the local legal landscape can help investors budget for potential risks, and thoughtfully structuring a deal can sometimes help reduce that risk. For instance, when appropriate, transferring a property's holding company rather than the property itself can avoid triggering an increase appeal.

Further, properly allocating a purchase price—either among multiple properties in a portfolio or among the different components of a going concern—can avoid misinterpretation of deeds and transfer tax statements by local taxing authorities. This also ensures Pittsburgh's 5% transfer tax is applied to the real estate only.

Net lease investors should also be aware that, while many states can be described as "fee simple" or "leased fee" jurisdictions, Pennsylvania is unique in that, in practice, its courts will usually tax a leased property according to whichever of those values yields greater taxes. Through a series of cases over 15 years, Pennsylvania's appellate courts have struggled to base a property's taxation on its "economic reality."

Currently, a property achieving above-market rent is assessed according to its leased fee value (which will be greater than the fee simple value), while a property with below-market rent will be taxed at its fee simple value (which will be greater than its leased fee value). Under this system, two physically identical properties within the same taxing district can be assessed at wildly different values.

Neighborhood Discrepancies

Anthony Barna, senior managing director of Integra Realty Resources Pittsburgh, cautions investors to vet property specifics. "People keep saying,'Pittsburgh's hot,' but it's not the whole region," he says. "It's not even the whole city."

While office vacancy in the CBD had reached a 10-year high even before the onset of the pandemic, some nearby neighborhoods including Oakland and the Strip District can barely satisfy demand. Similarly, new apartments in popular neighborhoods like Lawrenceville are stabilizing quickly at record rental rates, yet rents and occupancies in other neighborhoods remain flat.

"The lack of a significant population increase in the city, coupled with the large number of new residential units coming online, threatens the economic balance and risks an oversupply," Barna observes.

Even more fundamentally, Barna says "a lot of our neighborhoods don't yet have the infrastructure to actually support what someone might want to build." In fact, Amazon cited infrastructure concerns as a major factor in its decision to drop Pittsburgh as a final contender in its HQ2 search.

Similarly, developers should investigate available tax breaks, which vary by location. Frequently these come in the form of Tax Increment Financing (TIF) or Local Economic Revitalization Tax Assistance (LERTA). In 2019, Pittsburgh opened all neighborhoods to potential tax benefits for new developments that meet certain employment or affordability requirements.

Tammy Ribar, Esq., Director at Houston Harbaugh who concentrates her law practice in commercial real estate transactions, advises that additional opportunities are available through various government bodies and can entail program-specific deadlines. "I think the best advice I can give to buyers is to research and understand in advance what programs are available and be informed about applicable deadlines, so that a relatively easy opportunity for savings is not missed," says Ribar.

Based on the recent pace of construction throughout the city, many investors have clearly decided that Pittsburgh's anticipated rewards outweigh its risks. And as many have learned, working with knowledgeable locals during planning can help to avoid headaches – and create significant savings later.

​Cris K. O'Neall Esq. of Greenberg Traurig LLP discusses why multifamily property taxes are excessive and what taxpayers should do about it.

While COVID-19 has diminished value and property tax liability for all types of real property, it has been especially hard on multifamily housing owners.

State and local shelter-in-place orders that limited business operations have contributed to reduced rental income and vacancies for most commercial property types. In extreme cases, residents have gone out of business or into bankruptcy, eliminating revenues. Many owners have shuttered vacant commercial properties during the pandemic, which at least allowed them to curb spending on utilities and other operating costs.

Few multifamily owners have had that luxury. People still need a place to live, so they continue to occupy their apartments even though they may not be paying rent. As a result, many multifamily operations have lost revenue without reducing occupancy, exacerbating anemic rent collections by compelling landlords to pay operating expenses on fully occupied complexes.

THE PROBLEM: RESIDENTIAL EVICTION MORATORIUMS

In March, COVID-19 prompted the federal government and many states to declare emergencies; counties and cities immediately placed moratoriums on evictions of apartment dwellers for nonpayment of rent. California's experience was typical, with over 150 cities and nearly all metropolitan counties in the Bay Area and Southern California passing eviction moratoriums. Similar restrictions adopted throughout the nation prevented residential landlords from evicting residents for not paying rent.

The specter of millions of apartment dwellers forced from their homes remains very real. With over 45 million renter households in the U.S., the magnitude of potential evictions and the possibility of creating a huge homeless population overnight is staggering.

In August, Stout Risius Ross LLC estimated that 42.5 percent of renter households nationwide were unable to pay their rent and at risk of eviction due to the economic impact of COVID-19. Mississippi showed the highest percentage of renters in distress at 58.2 percent, while Vermont had the lowest at 20.0 percent. Percentages in the major states ranged from the low 30s to 50s.

MORATORIUMS EXTENDED

Many eviction moratorium ordinances either expired by June or were set to expire in early September. The Centers for Disease Control and Prevention responded by issuing an order on Sept. 2 (85 FR 55292) that, prior to Jan. 1, 2021, courts must not evict renters for failure to pay rent. Two days prior to the CDC order, the California Legislature passed an emergency statute (AB 3088) prohibiting nonpayment evictions through March 31, 2021.

California's governor asserted the state's statute takes precedence over the CDC's order. The statute preempts similar county and city ordinances, and the CDC's order states that eviction moratoriums in states that provide greater health-care protections than the CDC calls for are to be applied in lieu of the CDC's order.

The CDC's order and California's new law set renter income thresholds, but only to require greater documentation of need due to COVID-19's effect on a household. In California, the threshold is $100,000 for individuals or 130 percent of the median income in the county.

Renters below these thresholds need only submit a short hardship declaration to their landlord. The CDC's order and California's statute do not absolve residents, who must pay back-rent by Jan. 31, 2021 (CDC), or March 31, 2021 (California). In addition, California requires residents by Jan. 31, 2021, to pay 25 percent of rent owed for September 2020 through January 2021.

EVICTION MORATORIUMS AND PROPERTY TAXES

The National Apartment Association in 2019 estimated 14 cents of every dollar of rent goes to property taxes. Property owners receive 9 cents, while 27 cents pays property operating expenses and 39 cents goes to the property's mortgage.

Obviously, if there is no rent being paid but properties are still being occupied, owners must continue to pay property taxes, operating expenses, and their mortgages (mortgage relief is generally only available, under the CARES Act, to small property owners or owners with government-backed mortgages).

How will these moratoriums affect multifamily property taxes? Whether residents will resume paying rents early next year is far from certain, and back rent may never be paid. These unknowns will affect what multifamily properties' taxable values should be in 2020 and what they will be in 2021.

County assessors generally value multifamily properties using an income approach, starting with gross income netted against operating expenses. Capitalizing that income indicates a value that is the basis for determining the amount of property tax owed. The capitalization rate is based in part on the anticipated risk associated with the property's ownership, or the likelihood the property will continue to generate income.

The difficulty with using the income approach right now is that gross income declined precipitously and remains depressed many months later while operating expenses continue unabated, and there is no assurance back rents will be paid in 2021. The result in many cases is negative net income, which implies negative values and lower property taxes. In addition, capitalization rates are difficult to forecast because no one knows when COVID-19 health restrictions and related eviction moratoriums will be lifted. This uncertainty increases capitalization rates which, in turn, lower property values.

APPEAL ASSESSMENTS NOW

Given the economic challenges confronting renters, any multifamily property is highly likely to have declined in value in the short term, and potentially for the next year or longer. While assessors have promised "to take a hard look" at values in 2021 to see if they should reduce values and lower taxes, whether they will do so remains to be seen.

In view of this, multifamily property owners and managers would do well to appeal their property tax bills this year or during the next available appeal season. This will help ensure tax assessments for this year and future years account for the damage COVID-19 eviction moratoriums have inflicted on multifamily property values.

Cash-strapped municipalities may look to extract more revenue from commercial properties.

It would be difficult to conceive of a more impactful event for the commercial real estate market than the coronavirus pandemic. Short of finding a cure for COVID-19, the tremendous state of flux in the sector will test the resourcefulness of commercial property owners and operators for months or years to come.

Market changes always create winners and losers; the more dramatic the shift, the greater the wins and losses. In the current market shakeout, commercial property owners are asking how to best position themselves to land on the winning side. The old standby that "cash is king" is sure to apply as the economic fallout settles, and reducing the real estate tax burden is a great way to conserve capital.

But it won't be easy. Taxpayers who plan to contest high taxable values on their commercial properties face an uphill climb. Here are some common difficulties to expect, along with opportunities to consider in tax appeals.

Valuation date dilemmas. The first problem for many owners who want to reduce their tax burden relates to the timing of the pandemic. Most U.S. communities began feeling the impact of COVID-19 in March or later. However, most jurisdictions had already assessed properties with a fixed valuation date of January 1, 2020. Also, most assessors are unwilling to consider the coronavirus in valuation until January 2021.

Damage provisions. Some jurisdictions have statutory provisions that may apply to properties for the damage done by COVID-19. There is a push to clarify Ohio's statute to recognize the effects of COVID-19, for example. There are similar provisions under consideration in Illinois. Additionally, Pennsylvania has valuation dates that could prove useful for taxpayers. NAIOP and other real estate organizations have supported these actions at various levels. Owners should determine whether they can claim pandemic-related damages in contesting tax bills they are now receiving.

What about next year? Even if a taxpayer cannot pursue a challenge on the current assessment, they can take steps to reduce future assessments. This means meeting with the local assessor to establish a proper assessment before it becomes final.

For taxpayers who choose to follow this advice and address future assessments now, make sure to treat any informal meeting as if it were a hearing. Come prepared — with accurate data demonstrating the impact on property value. Discussing anecdotally that stay-at-home orders and other restrictions affected the property value is insufficient — these circumstances are the reason the taxpayer can begin the conversation, but not the substance of a compelling case for revaluation.

Substantiate arguments. Show the assessor hard numbers demonstrating how COVID-19 or the post-COVID economy affected the specific property. Have social-distancing measures, residential migration or other changes created density challenges? Is there a measurable decline in occupier demand, or a decline in foot traffic and business activity at tenants' businesses? What is the economic feasibility of the tenant base? Whatever the reasons for revisiting the valuation, the property owner should be prepared to show the impact with the same supporting material they would use to pitch the project to investors or lenders. Use facts and figures. Bring in experts. Many taxpayers are fighting for the survival of their investment, and they should act accordingly.

Vet the team. Insist that any outside tax counsel or consultants understand the taxpayer's position. This is not business as usual, so educate advisors about the real estate's value. Work as a member of the team and communicate with its members, from local counsel to the valuation expert, and talk with the individual who will meet with the assessor. Formulate a plan together and then be flexible, allowing people to pivot when they see something changing. If the team understands how to determine assessed value and understands the owner's position, then trust them to make changes in the moment as they see fit.

Anticipate challenges. How can a taxpayer prove what the assessment should be amid so much uncertainty, and with little to no sales evidence to assist in determining value? Always attack the obvious head on. For instance, if the price paid for a recently purchased property is unhelpful, analyze the sale using the same expectations established in due diligence. This may eliminate the sales price as an indicator of market value, allowing the team to then present more beneficial and relevant points. Use the law, use facts and use prior experience where similar facts lined up.

Prepare for resistance. State and local governments are in a tough spot. All over the country, there are budgetary shortfalls at the local level because of the pandemic. Many communities and schools rely on income tax, sales tax and property tax, but in the current environment there is little sales tax revenue, and it appears income tax will take a hit. Property tax is all that is left.

Appeals will not be easy. The team's appraiser must be able to establish a value and defend it. Their testimonial skills, whether in court, at a hearing or informally, are as important or more important than the valuation itself. Also, contact a local expert; market value may not be the only available avenue to a fair and uniform assessment. Owners fortunate to have their commercial properties fairly and uniformly assessed (and not negatively impacted in the pandemic) can perhaps refrain from filing an appeal. In a state where a board or court can raise assessments, an unwarranted appeal may lead to an increase in assessment, although in most states, increased assessment from a tax appeal is rare.

Numbers of lawsuits remind taxpayers and assessors to exclude intangible assets from taxable real estate value.

A recent case involving a Disney Yacht and Beach Club Resort in Orange County, Florida demonstrates how significantly tax liability can differ when an assessor fails to exclude intangible assets. For Disney's property, the tax assessor's and Disney's valuation of the property differed by a whopping $127.8 billion.

Real estate taxes are ad valorem, or based on the value of the real property. And only on real property.

The precise definition of real property varies by jurisdiction but generally is "the physical land and appurtenances affixed to the land," which is to say the land and any site and building improvements, according The Appraisal of Real Estate, 14^th Edition.

Your real property tax assessment, then, should exclude the value of any non-real-estate assets. That includes tangible personal property like equipment, or intangible personal property like goodwill.

When real estate is closely linked to a business operation, such as a hotel, it can be difficult to separate business value from real estate value. If the business activity is subject to sales, payroll, franchise, or other commercial activity taxes, then the assessor's inclusion of business value in the property assessment results in impermissible double taxation.

In Singh vs. Walt Disney Parks and Resorts US Inc., the county assessor appraised the Disney resort using the Rushmore method, which accounts for intangible business value by excluding franchise and management expenses from the calculation of the net income before capitalizing to indicate a property value.

Disney argued the Rushmore method did not adequately separate income from food, beverage, merchandise and services sold on the real estate, not generated by leasing the real estate itself. Disney also argued that the assessor included the value of other intangible assets like goodwill, an assembled workforce, and the Disney brand in the valuation.

The trial court did not rule on the propriety of the Rushmore method but found its application in this case violated Florida law. Referencing an earlier case involving a horse racing track (Metropolitan Dade County vs. Tropical Park Inc.), the court agreed with Disney that "[w]hile a property appraiser can assess value using rental income or income that an owner generates from allowing others to use the real property, the property appraiser cannot assess value using income from the taxpayer's operation of business on the real property."

The trial court decision was appealed to the district court (appeals court). The appeals court found the Rushmore method, not just its application, violated Florida law by failing to remove all intangible business value from the tax assessment. When the case returned to the trial court on another issue, the appeals court instructed that the Rushmore method should not be used to assess the property.

In deciding Disney, both courts found SHC Halfmoon Bay vs. County of San Mateo instructive. That case involved the Ritz Carlton Half Moon Bay Hotel in California. The California court had rejected the Rushmore method because it "failed to identify and exclude intangible assets" including an assembled workforce, leasehold interest in a parking lot, and contract rights with a golf course operator from the property tax assessment.

The Disney trial court also looked to the Tropical Park horse track case, where the tax assessment improperly included income generated from the business betting operation not the land use.

Similarly, in an Ohio case involving a horse racing facility, the state Supreme Court rejected a tax valuation that included the value of intangible personal property in the form of a video-lottery terminal license (VLT) valued at $50 million by the taxpayer's expert (Harrah's Ohio Acquisition Co. LLC vs. Cuyahoga County Board of Revision). The property had a casino and 128-acre horse racing facility including a racing track, barns, and grandstand.

The Ohio Court recognized that the VLT had significant value that should be excluded from the real property tax assessment. It rejected the argument that the license was not an intangible asset because it could not be separately transferred or retained. Looking at its prior decisions, the Court had recognized a non-transferable license could still be valuable to the current holder of that license, and that value should be exempt from real property taxation.

Experts continue to disagree about the best method to appraise assets with a significant intangible business value component.Nonetheless, these court cases underline again how important it is for your tax assessment to exclude intangible assets. With most commercial property owners facing onerous tax burdens based on pre-COVID-19 valuation dates, it is even more critical that intangible assets are removed from valuations for property tax purposes. Work closely with assessors, knowledgeable appraisers, and tax professionals to ensure you only pay real estate taxes on the value of your real estate.

Commercial property owners are a tempting target for cash-strapped governments dealing with fallout from COVID-19, writes Morris A. Ellison, a veteran commercial real estate attorney.

Macro impacts of the microscopic COVID-19 virus will subject the property tax system to unprecedented strains, raising the threat that local governments will turn to property tax increases as a panacea for their fiscal woes.

Local governments face formidable financial challenges. One article by Smart Cities Dive suggests that the crisis will blow "massive holes" in municipal budgets, with 96 percent of cities seeing shortfalls due to unanticipated revenue declines. The Washington Post reported that more than 2,100 U.S. cities expect budget shortfalls in 2020, with associated program cuts and staff reductions. The National League of Cities recently estimated that the public sector has lost over 1.5 million jobs since March. Governmental temptation to increase the tax burden on commercial properties will be difficult to resist.

Commercial property owners face similarly unprecedented challenges. Many owners of properties that traditionally served long-term uses for hospitality, retail, office and restaurant activities are now questioning whether those uses will continue. Many properties will need to be repurposed, but to what? Some owners are reportedly considering converting hotels to apartments, for example.

Property taxes are a major component of the costs landlords must examine in determining when and how to reopen. High property taxes, which are generally passed along to commercial tenants, will exacerbate those business' economic problems. While owners can influence some occupancy costs, others, such as taxes and insurance, are largely beyond their control.

RATES, DATES AND VALUES

Real estate taxes reflect both taxation rates and assessed values, but property tax appeals must focus on a property's value. Values hinge on key concepts such as valuation dates, capitalization rates, and highest and best use. The property tax system assumes that values change only gradually, often assessing a property's value by creating a fictitious sale between a willing buyer and seller on a statutorily defined valuation date.

With valuation dates set in the past, assessors tend to value through the rearview mirror. Looking to make a deal, investors, by contrast, look prospectively in deciding whether to buy or sell a property. These viewpoints can clash, particularly when events affecting value occur after the valuation date.

That is why the commercial property owners clamoring for immediate property tax reductions will likely be disappointed, at least until a tax year when their statutorily mandated valuation date postdates COVID-19's onset.

For example, if a taxpayer's bill is based on a fictional sale occurring on Dec. 31, 2019, before the black swan of COVID-19, the assessor is statutorily bound to value the property at its pre-pandemic value.

Some jurisdictions maintain a valuation date for years. That value may change substantially once the valuation date postdates early March 2020, but few state statutes will authorize revaluations based on COVID-19 as a "changed circumstance." A pre-COVID-19 valuation could therefore burden a property for years.

Like the systemic market downturn of 2008, the COVID-19 pandemic will create great uncertainty in capitalization rates, which reflect risk associated with a property's income. This will provide good fodder for argument in tax appeals. The difference this time may be the added uncertainty surrounding the highest and best uses of various commercial properties.

In negotiating a transaction involving income-producing properties, prudent parties analyze future trends. Looking forward, they would interpret weakening tenancy with heightened risk associated with occupancy, rent collections and overall tenant credit-worthiness. They would know that tenants' missed rent payments can lead owners to miss mortgage payments, which can lead to foreclosure.

Contrary to this real-world tendency to look ahead in a transaction, assessors have often assumed a property's highest and best use is its traditional or current use. Trends of working remotely, social distancing, and the rapid, dramatic shift to online retailing turn this assumption on its head.

OBSOLESCENCE ISSUES

Some businesses that closed during the pandemic, including many retailers, may never reopen. Anecdotal evidence of the market shift is manifold. Even before the COVID-19 pandemic, analysts were describing the shift to online retail as "apocalyptic" for many brick-and-mortar stores. Seasoned retailers including Neiman Marcus, Pier 1 Imports and J. C. Penney have declared bankruptcy. Many hotels have only been able to meet debt service obligations by tapping heretofore sacrosanct capital reserves, and airline travel has fallen off a cliff. In April, CNBC estimated that 7.5 million small businesses may not reopen. UBS projects that 20 percent of American restaurants might close permanently.

Social distancing rules that reduce restaurants' serving capacity may remain in place indefinitely. Combined with the loss of clientele, such as office workers that no longer work nearby, these conditions could mean closures for low-margin restaurants. Increasing occupancy costs and revenue declines accompanied by increased taxes could tip the balance.

Office values have historically been less volatile than retail property values, but this may change with the move to remote work. Change will be less apparent where many tenants remain subject to long lease terms, but some form of remote working is likely here to stay, and this suggests office tenants may well need less or different space.

Will an office tenant renew its lease? If so, at what rate? And will the tenant downsize? A key indicator of a weakening market is when tenants with long terms remaining on leases sublet space. In a declining market, tax assessors seldom look behind historic income statements to consider these weaknesses, which should be a risk reflected in the capitalization rate.

DON'T DELAY TAX PLANNING

Retail, office, and hospitality property values almost certainly will decline, at least in the short run. For transactional and property-tax purposes, commercial property owners should examine carefully whether the property's "highest and best use" has changed. Local governments that ignore these market changes in an effort to generate short-term tax revenues may exacerbate their long-term revenue problems.

Smart property owners may be able to mitigate the fallout by focusing tax appeals on the concepts of valuation date and highest and best use. They should also note the uncertainty inherent in capitalization rates.

Tax appeals in 2020 may prove especially challenging for cash-strapped commercial taxpayers because statutorily mandated valuation dates likely predate COVID-19. However, the longer-term risk rests with local governments. If they ignore changes in highest and best uses, and if taxing authorities fail to account for the increased risk in capitalization rates, governments may unwittingly increase the pandemic's economic damage.