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.
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.