Mistaking rehabilitation for new construction, assessors inflate post-superstorm tax assessments.
Four years have passed since Superstorm Sandy slammed the East Coast and crippled the Northeast. The overwhelming majority of media coverage centered on the devastation suffered by residential properties, paying little attention to the tens of thousands of commercial property owners who suffered equally historic destruction.
The rebuilding process has been a feast for local tax assessors, who have increased property assessments throughout these Sandy-stricken areas based on the misguided opinion that rehabilitated commercial properties should be valued as newly constructed buildings, ignoring the financial realities and stigma attached to "Sandy properties."
The post-Sandy rebuilding process has taken years, requiring commercial property owners to overcome insurance claim nightmares, bureaucratic red tape, and the massive exodus of tenants who either lost their businesses or relocated as a result of the storm. Too often, local tax assessors ignored the hardships suffered by these property owners, taking advantage of the reconstruction by increasing assessments well above pre-Sandy values to increase their tax base.
Fortunately, the laws of each state allow landlords or property owners to reduce unfairly increased property tax assessments by filing a commercial tax appeal. These appeals offer the owner or the owner's representative the opportunity to prove that the property is worth less than its current taxable value. Whether that tax-reduction opportunity occurs at an administrative hearing, through negotiations or in the courtroom, taxpayers are best served by seeking the expertise of an attorney experienced in navigating the appeals process and the valuation of commercial properties.
Proper Valuation vs. Unfair Increases
Traditional methods to valuing commercial real estate for property taxation include the sales-comparison, cost, and income capitalization approaches. Sales comparison typically relies upon arms length sales data. Unfortunately, there is very little arms-length transaction data in Sandy-ravaged areas because the market has been flooded with sales of distressed properties.
The cost approach should only be applied when valuing new construction or specialty properties.
When tax assessors value commercial buildings as in-come-producing properties, they capitalize the subject's net income stream, or if owner-occupied, the income it would generate if leased. Appraisal professionals and the courts agree that this income-capitalization approach is the preferred method of valuation at a commercial tax appeal.
Nevertheless, local tax assessors have been leaning on the cost approach when valuing post-Sandy re-habilitated retail properties. These assessors mistakenly perceive a property owner's rehabilitation or reconstruction work as equivalent to a capital improvement or new construction, at the same time ignoring the economic realities that these property owners faced as a result of the storm. More specifically, the cost approach ignores increased expenses, extended periods of vacancy and the difficulty that landlords continue to face in luring tenants back to properties destroyed by the storm. This unfortunate valuation practice has inflated tax assessments and created unfair tax burdens.
Hidden Costs Linger
Sandy's impact runs deeper than brick and mortar reconstruction. Cleanup, rehabilitation and lingering stigma have forced landlords to contend with increased expenses and lengthy vacancies. The stigma that follows a "Sandy property" is similar to that attached to cars sold in New Orleans after Hurricane Katrina, engendering the burdensome label of "Katrina cars."
Like suspicious car buyers in Katrina's wake, prospective tenants either ran for the hills or demanded low rents with short-term leases after learning that a property was ravaged by Sandy. The fear of the unknown resulted in tenants searching for what they perceived as less risky locations further inland.
In addition to disproportionately high vacancies, Sandy-stricken property owners have had to contend with significantly increased expenses. Insurance is one example. Not only have premiums skyrocketed due to the perceived risk of owning property near Sandy's point of impact, but the Federal Emergency Management Agency has issued new flood zone maps that expand many flood zones inland. Flood zone boundaries have compelled landlords to purchase flood insurance in areas that are relatively far from the shore, regardless of whether their property incurred damage from the storm.
Property owners typically bore the costs to rehabilitate flooded and destroyed properties, because many insurance companies exclude wind or hurricane damage from coverage. Other properties sustained damages in excess of policy limits. Unfortunately, many owners lacked the necessary funds to rehabilitate, leaving entire shopping centers abandoned.
Property owners who were lucky enough to have full coverage still had to deal with empty buildings and high carrying costs for many months during ongoing construction.
Taxpayers Fight Back
The key to a successful property tax appeal is to arrive armed with data supporting the argument that the subject property is worth less than its assessed, taxable value. For commercial property, the owner or their representative should analyze the subject's income and expense history, together with market data of similar properties in the area. For a Sandy property, this analysis should concentrate on the actual economic harm suffered as a result of Sandy and its aftermath.
In order to do this, prior to filing a property tax challenge, the taxpayer's representative should review copies of the leases, rent rolls and income and expense data of the subject from the last five years. Assuming the asset suffered major vacancies, the property owner's representative must be prepared to discuss and produce documentation or an affidavit attesting to the hardships faced in trying to rent the property and overcome the stigma associated with marketing Sandy-stricken space. In addition, the owner must be prepared to produce and discuss all insurance claims, including awards and denials, and provide an accounting of all out-of-pocket costs associated with the property's rehabilitation.
A carefully prepared and documented presentation of the facts offers the owner a real possibility to avoid unfairly high property tax assessments on these Sandy-impaired properties.