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Property Tax Crush Demands Action

Without steps by government officials, coronavirus-related property devaluations won't be taken into consideration, warns veteran tax lawyer Jerome Wallach.

U.S. businesses and lawmakers face an array of challenges related to the COVID-19 pandemic. Looking ahead, let's add one more legislative task to that list which, if addressed early, will better enable the economy to bounce back from the current disruption: Provide tax relief for the owners and tenants of commercial properties devalued by vacancy stemming from the virus and efforts to slow its spread.

One of the only tools available to federal, state and community leaders seeking to slow the spread of the disease has been to limit opportunities for person-to-person transmission. Ever-tightening restrictions, either voluntary or enforced, limit or halt the use of commercial properties ranging from restaurants, bars and hotels to call centers, office buildings, stores, entertainment venues and other structures.

While necessary, these measures will drive growing numbers of tenants into distress up to and including closing their doors, defaulting on lease payments or both. Near term, this will slash property income streams and reduce property owners' ability to pay expenses including property tax on partially or fully vacated properties. Longer term, companies struggling to regain their footing and new tenants moving into spaces vacated during the crisis can expect much of their monthly occupancy costs to include a weighty property tax burden based on assessments completed when real estate values were near all-time highs.

Widespread devaluations likely

Even before President Trump declared a national emergency related to the coronavirus on March 13, researchers were tracking widespread commercial real estate devaluations as reflected in REIT performance. The day before the emergency declaration, economists at the UCLA Anderson School of Management concluded that the U.S. had already entered into a recession. The following Tuesday, March 16, news reports of a Green Street Advisors presentation conveyed that the performance of REITs and drop in share prices suggested investors had marked down asset values, on average, by 24% over the course of the previous month. According to news coverage, a Green Street presenter predicted that private market real estate values would decline by another 5% to 10% over the next six months.

Such a rapid decline in property income and market value creates worrisome property tax implications for taxpayers in most jurisdictions. In months to come, when landlords and tenants may anticipate struggling to recover from the pandemic in a flat or recessionary economic environment, they can also expect to receive property tax bills (or tax liability passed through and attached to their lease obligation) based on pre-crisis property values. In many cases, those assessed values will far exceed current fair market value.

Assessors in the jurisdiction in which this writer practices value real property for ad valorem tax purposes as of the first year in a two-year cycle. This means that, for most local owners, property tax bills they receive this year and last year both reflect their property's fair market value as of Jan. 1, 2019. The time to appeal the 2019 value as set by the assessor has long since run out. Short of an intervening event such as a fire or tornado damage, or perhaps construction or addition of a building or other physical improvement, the Jan. 1, 2019, base value is effectively carved in stone and is no longer subject to legal review or modification.

In those jurisdictions where the value may be determined later, it is most typically set on Jan. 1 of the current year. Even if time remains to contest those values, however, most tax statutes would treat any change in value occurring after the effective valuation date to be irrelevant to tax bills based on that valuation date.

Appeal to lawmakers

COVID-19's impact on property values will be profound if not catastrophic. It would seem to be a callous response for a government official to say, in effect, "So what? The assessor followed the law and valued your property before the pandemic."

A storied law professor used to tell his students, this writer among them, that "there is no wrong without a remedy." Paying taxes based on a value that no longer exists is a wrong, yet there seems to be no immediate remedy.

Indeed, few tax codes will provide taxpayers with relief from the unfair burden they face in the wake of this sudden, global crisis. Remedy will require educating lawmakers and the public about this pending tax dilemma.

Phone calls, letters, texts and emails to government officials at any level may help. Perhaps, together, we will find a solution that balances government revenue requirements with current property values.

Jerome Wallach is a partner at The Wallach Law Firm in St. Louis, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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