Reported transaction prices tend to show up again as overstated taxable property values, advises attorney Jerome Wallach.

The old maxim that no good deed goes unpunished might well be applied to official disclosure of the acquisition price on real estate.

Many jurisdictions require the disclosure of a property's sale price after the sale closes. All too often, buyers respond by reporting a number which includes non-real-estate components. Although they are acting in good faith, these investors seldom realize that the local tax assessor may use the acquisition price they report in determining the property's market value for ad valorem tax purposes. That can result in an overstated assessment when the price reflects the value of the going concern constructed on the property rather than the real estate alone.

Disclosure exposure

There are several reasons a buyer will broadcast the exchange price for acquired real estate to the public domain. The new owner may want the number known because it will enhance the public image of the buyer's business. It may be a legal requirement to report the purchase price. Many jurisdictions require the filing of a certificate of value, for example. Whatever the reasons, the buyer and soon-to-be owner closing on a real estate acquisition should be careful how the deal is characterized when reported.

Tax assessors, appraisers and other real estate professionals are skilled at tracking down sale prices. There are also services that regularly publish sale prices gleaned from a variety of sources. Taxpayers should assume that the assessing authorities will learn the price of their property acquisition.

While purchasers of real property typically factor in the effect of property taxes on the net cash flow, they may not consider the impact the exchange price can have on property taxes in the coming years. Frequently, the higher the published transaction value, the more that news will bolster the buyer's business reputation. Not so for property tax consequences, however, because assessments and ongoing property tax liability will often increase in proportion to the published transaction amount.

An assessor seeing a certificate of value or reading a published sale price can and frequently will rely on that number as the property's market value, against which ad valorem taxes are levied. Unfortunately, that number may not fairly represent the taxable value of the real estate if it includes value from non-real-estate components, which are not subject to ad valorem taxes.

Differentiate real estate value

Hotels provide an example of how the reported sale price differs from the real estate value. Appraisers cite comparable hotel sales in terms of value per room, which may include the television, beds and other items in each room as well as the hotel's brand and other components of business value that are exempt from property taxation. Some analysts adjust for the non-realty components of per-room sales data, but most do not.

However, the problem isn't unique to the hospitality sector and may apply equally to other property types.

In the larger view, the same miscalculation could apply to other properties where non-realty components were part of the transaction. Non-real-estate sources of transaction value can include leases in place, brand recognition, in-place management and trained workforce, personal property such as vehicles and furniture, and ongoing business operations within the property. The assessor may have included all these elements, inappropriately, in the value of the real estate. This is a situation the taxpayer could have avoided by correctly reporting that the price exchanged for the property included non-real-estate items.

Disclose with care

Exercising some foresight in describing the elements of the sale at the time of closing could mitigate the unwanted effect of triggering an inflated tax assessment on the subject property. In reporting, the buyer should pay attention to how they characterize the acquisition price, with a view toward how the information may influence an assessor's calculation of taxable value.

It is predictable that the assessor will be aware of the purchase price. In fact, the number is required public disclosure and will, in all probability, become the assessor's opinion of market value. At any hearing or proceeding resulting from the taxpayer challenging the assessor's opinion of market value, the assessor will likely put forth the public disclosure document as prima facie evidence of market value.

The new owning entity can protect itself by laying the groundwork for assessment appeals when it discloses the transaction amount. When appropriate, the closing statement should clearly represent that the acquisition is for going-concern value, which encompasses both real estate and the business operating in that real estate. An asterisk after the number, with an accompanying footnote, would suffice as long as there is a clear indication that the number relates to enterprise value.

Assessors frequently rely on the acquisition price of a going concern as equaling the value of the real estate alone. When that occurs, a buyer's footnote on a price disclosure can pay dividends in any proceeding challenging the assessor's opinion of value.

District of Columbia taxpayers can appeal assessed property valuations through three levels of review.

In the District of Columbia, a prudent taxpayer must observe important steps and deadlines to appeal a real property tax assessment. Strict code provisions, government policies and procedures govern the appeal process, so understanding the typical lifecycle of an appeal provides a head start in making sure a property is fairly assessed.
Here is a look at what to expect as a case advances:

Assessment and notification
Assessors reassess all real property in the District each year using a Jan. 1 valuation date that precedes the start of that tax year. For example, Tax Year 2023 runs from Oct. 1, 2022 through Sept. 30, 2023. Thus, corresponding assessed values are as of Jan. 1, 2022.

The District typically will mail assessment values and update the MyTaxDC.gov website on or around March 1 each year, sending its estimate of market value to the owners of more than 205,500 parcels. This will be the taxpayer's first glimpse of the valuation and potential tax liability for the following tax year.

These assessed values are released without supporting documentation, however.

To determine how an assessor derived the value, the taxpayer or a duly authorized agent must contact the Office of Tax and Revenue to request a copy of the assessor's workpapers. These documents will be critical in formulating the basis for any possible appeal.

1.) Office of Tax and Revenue
The first-level tax appeal deadline is April 1. While the property owner may not have all the relevant documents they need to properly analyze their assessment by this time, the taxpayer must meet the filing deadline or waive their right to any further appeal for the tax year.

Fortunately, the first-level petition is a one-page form completed online and requires only basic property information to satisfy the requirement. Continuing with a first-level appeal, however, demands further analysis.

The assessor may use one of the three common approaches to derive a proposed value — the income, cost and/or sales comparison approach — or any other approach that can be supported. For large commercial properties, the most common practice is to use the income approach in conjunction with the District's mass-appraisal model.

Mass appraisal uses market assumptions based on property type, submarket and classification. These assumptions derive from taxpayer-submitted income and expense reports (I&E) for the previous tax year. The assessor derives the property's net operating income using market assumptions and divides the result by a market capitalization rate loaded with the applicable tax rate. Or, in the case of retail properties, the assessor uses a net lease rate and an unloaded capitalization rate to arrive at taxable value.

Consequently, the yearly filing of income and expense reports is an integral part of the assessment process and is mandatory for most owners of income-producing properties. At the beginning of each calendar year, the District issues its notice of income and expense report filing requirements, along with unique access and submission codes for taxpayers to report their sensitive financial information using an online portal.

This portal opens in January, giving taxpayers adequate time to comply with the I&E submission deadline, which is on or about April 15 each year. (Due to a holiday, Tax Year 2023 I&Es are due Monday, April 18, 2022.) Timely compliance with this requirement is imperative, as failure may result in a 10 percent penalty on the subsequent tax year's liability. A local tax advisor can be a great help with this complicated process.

Once complete, and when applicable, the I&E will be a vital component to the analysis and validity of a tax appeal. If the taxpayer believes an appeal is warranted, they can move to a first-level hearing. This administrative appeal to the assessor of record generally occurs in May or June. The assessor reviews information the taxpayer provides and can adjust the value by first-level decision.

2.) Appeals Commission
If the initial appeal does not provide a satisfactory result, property owners may continue to the next administrative level. The taxpayer must initiate an appeal to the Real Property Tax Appeals Commission (RPTAC) within 45 days of the first-level decision or forfeit additional appeal rights.

Filing a petition with RPTAC requires the taxpayer to produce specific information such as property and financial data as well as supporting evidence to prove the current assessment is incorrect.

In other words, the assessment is presumed correct unless and until the taxpayer proves otherwise. RPTAC hearings generally occur between early October and the end of January. Hearings before a panel of two or three commissioners allow both parties to argue their positions and to answer commissioners' questions. The Commission should issue its decisions by Feb. 1 of the relevant tax.

3.) D.C. Superior Court
The District issues real property tax bills in March and September of the relevant tax year. This means, barring extraordinary disruptions that can include global pandemics, administrative appeals should be completed prior to the issuance of these bills.

If an administrative appeal does not achieve a result the taxpayer believes is fair, a further appeal to D.C. Superior Court is available.

To appeal to the Superior Court, the taxpayer must first pay all taxes in full and file a petition by Sept. 30 of the related tax year.
The proceeding will ostensibly become a "refund" lawsuit and may take several years to reach a resolution. However, if successful, taxing entities will be required to provide an additional 6 percent interest with any refund amount.

Importantly, any tax representative must be an active member of the D.C. Bar Association to handle this stage of appeal, which is a court proceeding. Therefore, to maximize the effectiveness of a tax appeal, a local tax attorney is best situated to guide a taxpayer through the life cycle of a property tax appeal.

New York City has published three tax-year assessments since COVID-19 swept into our world. The New York City Tax Commission and New York City Law Department have had ample opportunity to reflect and refine their thinking on those assessments.

The disease broke out in Wuhan, China, in late 2019 and soon spread around the world. Most of New York City noticed its impact in February and March of 2020 as businesses shut down at an accelerating rate, warranting government mandates and additional closures.

So, what did New York City do for the 2020-2021 tax year? It significantly raised tax assessments. The Tax Commission and other review bodies refused to base their valuations upon the devastating catastrophic effects of COVID-19 that had ravished the city.

Why do this? The answer is technical. New York City values real estate on a taxable status date, which is Jan. 5 each year. On Jan. 5, 2020, COVID-19 did not exist in assessors' evaluation process. Nor did it exist in the review of assessments later in the year.

Employment restrictions, mask mandates and lockdown requirements made it impossible to operate theaters, hotels, restaurants and many other businesses. These restrictions took effect long before the first installment of property tax payments for the 2020-2021 year had to be paid. Yet hotels found that their tax bills exceeded their total revenue. Other businesses had similar experiences.

The city's next assessment, for the 2021-2022 tax year, reduced assessments by 10 to 15 percent in some sectors, and by as much as 20 percent for hotels. It was too little, too late, and many businesses were failing. The assessment review process was slow and unsympathetic to the plight of businesses devastated by COVID-19.

The Jan. 5, 2022 assessment roll attempted to recoup a modest amount of the value trimmed from taxpayers' properties the previous year in spite of the destructive effects of the Omicron variant that were at their height on the Jan. 5 valuation date. That is the truth: New York City's newly released fiscal 2022-2023 property tax assessment roll presents a market value of almost $1.4 trillion, an 8 percent increase in taxes and estimated taxable assessments of $277.4 billion. That sounds like too much!

Real estate tax increases have come at a time when most property owners and businesses have not even begun to recover from the pandemic's economic impact. Foreign and business travel have disappeared; street traffic is down and empty storefronts abound.

Commercial rents in Herald Square, for example, are down 27 percent from pre-pandemic levels. However, high bills due to ever-increasing inflation remain to be paid. Mortgages, payrolls and maintenance costs add to the burdens of businesses in New York City. Most properties are still struggling, and many are falling behind.

The hospitality sector has been hit especially hard. Hotel revenues and prices have dropped to unsustainable levels. COVID-related rules and fears have evaporated any sustainable growth in tourism. One example of the pandemic hotel market value decline is the recent sale price of the DoubleTree Metropolitan at 569 Lexington Ave., which was 50 percent less than the price it sold for in 2011.

While a few market values have increased, tax increases should have been delayed. For Class 1 real estate, which includes residential properties of up to three units, total citywide market value rose 6.7 percent to $706.8 billion from the previous year's tax roll.

For Class 2 properties­ — cooperatives, condominiums and rental apartment buildings —the total market value registered $346.9 billion, an increase of $27.8 billion, or 8.7 percent, from the 2022 fiscal year. For Class 3 properties, which include properties with equipment owned by gas, telephone or electric companies, market value is tentatively set by the New York State Office of Real Property Tax Services at $43.6 billion.

Last but definitely not least, total market value for commercial properties (Class 4) increased by 11.7 percent citywide to $300.8 billion. Manhattan had the smallest percent increase in market value at 10.3 percent. Class 4 market value is down $25.2 billion, or 7.7 percent, below its level for the 2021 fiscal year. Hotels registered a market value increase of only 5.3 percent.

These slight increases in market value do not warrant this year's increase in taxes. Businesses are still being affected by the economic impact of the pandemic and need time to recuperate. The city's Department of Finance admits that although values increased for the 2023 fiscal year, they remain below the 2021 fiscal year values for many properties due to the impact of the pandemic.

The Department of Finance also acknowledged in its announcement of the tentative tax roll that commercial property values remain largely below pre-pandemic levels. This underscores why the increase in taxes should have been delayed, at least until properties and businesses attain pre-pandemic values.

Strategies for Relief

In appealing assessments, property owners can improve their chances for obtaining relief by quantifying property value losses. For hotel owners and operators, this means gathering documentation showing closure dates, occupancy rates and any special COVID-19 costs incurred. Most industry forecasts anticipate at least a four-year recovery period for hotels to reach pre-pandemic revenues.

Retail and office property owners should be prepared to show any declines in gross income and rents received or paid on their financial reports filed with the city. Residential landlords should list tenants that vacated and those that are not paying rent.

In conclusion, tax assessments must reflect the entirety of what this pandemic has done to the real estate industry over the past 24 months. New York City authorities must provide tax relief for property owners, and taxpayers and their advisors will need to take an active part in obtaining reduced assessments.

There's a spotlight on self-storage real estate values these days, which means owners need to make sure they're receiving a fair assessment of their property. Consider the following strategies to counteract excessive property taxes.

Since the arrival of COVID-19, no real estate sector has seen property values rise faster than self-storage. It's even outpacing warehouses, which are skyrocketing in the face of demand for fulfillment centers to handle spiking e-commerce volumes.

Simply put, self-storage is booming, and it isn't going unnoticed by investors; nor will assessors, who are charged with valuing properties for ad valorem tax purposes, ignore the trend. For this reason, owners and their advisors should be revisiting tried-and-true tax strategies and considering new ways to combat excessive property assessments.

Historically, many self-storage owners have been content to fly under the radar, accepting their assessed values without protest to avoid drawing too much attention. Given the recent industry growth, however, assessors will likely shine a light on the segment, pushing for higher assessed values. When that spotlight hits, it'll be time for taxpayers to fight for fairness. Until then, you should explore the tactics that have worked previously and new ones that might now be beneficial.

An Apartment for Your Stuff

One traditional method of lowering tax liability is to value self-storage like apartments. Most assessors and multi-family owners rely on the income approach, looking at rents, subtracting expenses, and capitalizing net operating income (NOI) based on the amount of risk in the investment.

The rental rates for apartments, like those for self-storage, are easily obtained online. But a key to accurate valuation is differentiating between asking rents and actual rents. The latter are always lower. If the owner or assessor isn't using actual rents or fails to fully consider all concessions, the property is being over-assessed.

Another strategy is to attack the cost approach, which assessors sometimes use instead of the income approach. It determines the replacement cost as if new of all the property's improvements, depreciates those improvements, and adds in the land value as if vacant. Almost everyone who employs the cost approach uses the Marshall & Swift Valuation Service cost manual (M&S). This practice has flaws, particularly when used by assessors in a mass appraisal setting. While M&S determines physical depreciation based on age, it can't and doesn't consider functional or economic obsolescence.

Functional obsolescence is a method of depreciating replacement cost based on issues within a facility, such as design flaws or property aspects that aren't as desirable in the marketplace as they once were. Economic obsolescence, also referred to as external obsolescence, is a method of depreciating the replacement cost based on factors outside of the property, such as a recession or, say, a global pandemic. Since M&S doesn't take these obsolescence features into account—and neither do assessors—self-storage owners and their representatives had better make sure they do.

If these time-tested methods don't yield the desired market value, the owner may choose to employ newer methods that've helped to achieve assessment reductions for other property types.

A Hotel for Your Stuff

When valuing hotels, many owners and assessors will use the income approach. They'll take the room revenue, subtract expenses, factor in risk and capitalize the NOI to reach a value. The problem with this method is some revenue in the income stream comes from intangible, non-taxable sources.

For example, a hotel's franchise or flag and the management agreement, among other items, can add to the revenue stream. These intangible elements should be identified and removed from the income approach to preclude valuing or taxing something that's intangible and, therefore, non-taxable.

There's a corollary argument to be made when it comes to self-storage. The "Big 5" brands in the market are publicly traded real estate investment trusts, each with an easily recognizable name and reputation that's likely to drive more traffic and revenue than an off-brand or non-branded facility. And a brand is an intangible asset, exempt from property tax.

As the Big 5 are also involved in the management side of the business, they're likely to bring intangible value from their operational expertise into the income stream. That revenue has nothing to do with the property's real estate value. The same can be said of the income generated from the sale of packing items such as boxes, tape and locks. These sales don't indicate value to the real estate, but rather value to the business.

Hotels can also suggest comparison metrics applicable to other property types. In addition to comparisons by price per square foot, hotel analyses can consider value per key, room revenue multipliers and revenue per available room. Like hotels, self-storage properties can be compared to each other in several ways. These can include value per lock, unit revenue multipliers and revenue per available unit. Of course, an appraiser or assessor would need to adjust for factors like interior vs. exterior access, climate-controlled vs. non-climate-controlled space, and single vs. multi-story improvements.

Which units of comparison to use for the most advantageous outcome will vary by taxing jurisdiction and the type of self-storage property. If it's in an area that requires all individual property types to be valued fairly and equitably, these units of comparison and the adjustments become ever more important to arrive at the correct value.

With nowhere to hide from the assessor's spotlight, the hope is that self-storage owners and their representatives will actively protest their increasing assessments. It's time for them to be proactive and creative in their arguments to achieve reductions.

Attorney Molly Phelan on how to reduce property tax liability.

Office property owners may feel they are getting squeezed from all sides in 2022, but the right strategy can help them turn lemons into lemonade by reducing property tax liability.

The Bad News: Inflation was up 7.1 percent year over year in December, its highest rate since 1982.

The Culprits: Supply chain issues (raw material shortages, seaport congestion and logistic limitations), labor shortages (general wages up 5 percent, retail wages up 15 percent), and a housing shortage (national apartment vacancy at 2 percent and average rent growth above 15 percent year over year).

The Response: The Federal Reserve signals a shift to tightening monetary policy, indicating future interest rate increases.

The office market is facing headwinds of its own. Numerous corporations have announced permanent shifts to hybrid in-person/work-from-home operations for office staff, significantly decreasing demand for office space. Rental rates have dropped anywhere from 5 percent to 33 percent during the pandemic, depending on market and class. Although Manhattan rents for Class A space have increased 2 percent in the past year, the net operating income for these properties is down 7 percent due to increased costs and lease concessions.

In the Midwest, office landlords previously expected to provide one month of free rent per year to woo tenants. Now brokers are reporting a free rent ratio of 1.6 months per year, with leases over 10 years pushing two months per year. Tenant improvement costs have increased approximately 44 percent since the beginning of the pandemic, and turnaround time for occupancy has increased from 30 days to 60 days.

Farther down the balance sheet, things aren't much better. Energy prices tracked in the S&P Goldman Sachs Commodity Index ended 2021 59 percent higher than in the beginning of the year. Labor costs, from janitorial staff to property managers, have increased as well.

The Good News: Although the market has handed office landlords a bucket of lemons that are putting downward pressure on average net incomes, landlords can make lemonade from this data to significantly reduce their real property tax liabilities, even if their NOI has not yet taken a hit.

The Strategy: Pivoting from a direct capitalization value analysis to a discounted cash flow approach can capture the effects of investor outlook data on a property's market value. Appraisers and assessors who value office properties typically figure direct capitalization in their income analysis to estimate fee simple market values. This is standard practice in stabilized markets but is a poor fit to current conditions.

With the dramatic changes and uncertainty in the office market, appraisers should be conducting discounted cash flow analyses, which identify the market conditions investors are anticipating as of the valuation date. The DCF analysis examines the market like an investor would, considering trends such as rental rate reductions and increases in operation costs and vacancy. These factors are then built into pricing models.

Savvy investors are aware of a sleeping giant that few assessors or taxpayers are identifying, and that is shadow vacancy. While landlords are still collecting income on current leases, there is no reflection of the market's precarious situation in their income. A DCF, however, identifies upcoming vacancy and reductions in market rents, which may have a significant effect on NOI.

Methods Compared

Let's compare the two approaches, beginning with a look at direct capitalization applied to a 500,000-square-foot office complex. As of Jan. 1, 2022, its tenants are paying $25 per square foot in net rent, or a maximum $12.5 million in annual attainable rent. Stabilized vacancy is 8 percent and operating expenses are 20 percent, or $2.3 million annually. A capitalization rate of 6.5 percent indicates a market value of $141,538,462. In Illinois, outside of Cook County, an assessment level of 33.33 percent and a tax rate of 5 percent equates to a tax liability of $2,358,738.

Paired with the estimated increases in interest rates as indicated by the Federal Reserve, the cap rate could easily increase to 7.5 percent for the specific property. The DCF analysis using these factors indicates the market value is $102,120,000 and the taxes are reduced to $1,701,830. The difference in tax liability is $656,909, or a reduction to the tenants of $1.31 per square foot in tax pass throughs.

Commercial real estate investors across the board rely on the discounted cash flow model, but few taxpayers or their advisors use the strategy in contesting property assessments. Given the additional information and analysis required to perform the analysis, not all appraisers can properly construct a credible discounted cash flow model.

For success, it is critical that both the taxpayer's advisor and appraiser be able to knowledgeably discuss the differences between the two models, and in an assessment appeal, be able to explain why the discounted cash flow model is a more reliable methodology in this market.

To remain competitive, landlords must reduce occupancy costs for tenants and their own holding costs as they take back more vacant space. Even if an assessment has been lowered or remained stable over the past few years, having a credible team provide an alternative view can offer a competitive advantage moving forward.

Ensure tax bills reflect continuing value reductions for office assets caused by COVID's long-term effects.

Since early 2020, the COVID-19 pandemic has upended lives and disrupted the normal course of businesses, including those in the commercial real estate market. As in many other sectors, however, this public health crisis has not affected all commercial properties equally.

Real estate occupied by essential businesses such as grocery stores, sellers of household goods, and warehouse clubs, for example, have weathered the pandemic well. A few have even increased their market share. By contrast, many office buildings, hospitality and non-essential retail properties have suffered severely.

Taxing jurisdictions and assessors have responded to the crisis with varying degrees of success. The Ohio Legislature passed special legislation (spearheaded by Siegel Jennings Managing Partner Kieran Jennings) to allow a onetime, 2020 tax year valuation complaint for a valuation date of Oct. 1, 2020, since the usual tax lien date of Jan. 1 would not have shown the effects of COVID. Other assessors applied limited reduction factors to account for the sudden pandemic-induced decrease in property values.

As values recover, it is important for taxpayers to monitor still-unfolding consequences as they review their property tax assessments.

Initially, hotels and experiential property uses suffered the steepest losses as travel declined or completely halted. While the long-term effects of COVID-19 are still emerging as the pandemic progresses, office properties may be the real estate type changed the most, and perhaps permanently so. Central business districts and suburban campuses or headquarters have been particularly hard hit.

In the last six to 12 months, many people have returned to working in an office at least part of the time, especially since vaccinations have become widely available. However, the emergence of virus variants has stalled the full return to the office that looked imminent earlier this year.

Some firms including Twitter, Zillow, Spotify, and Dropbox decided that they will not require workers to return to the office at all, making remote working a permanent option. Other companies including Google, Nationwide, Microsoft, and Intuit will continue with a hybrid model that requires workers to be in office some of the time.

Many of those employers are using an office hoteling model. Hybrid arrangements require less physical office space per employee, although employers will need to balance having fewer employees onsite against the desire for low-density occupancy.

With more employees working remotely, many office tenants have subleased space they no longer need, adding to available office supply. For example, toward the end of 2020, the Chicago metro region's office market reached a record high in available sublease space, with two-thirds of it in the central business district. For employees who work in CBDs, there is an added concern of commuting via public transit.

In the initial stages of non-essential business closures and governmental stay-at-home orders across the country, many tenants sought rent abatements and concessions. Tenant defaults and increased unemployment exacerbated office vacancy levels.

Some of the workforce in more densely populated markets may have relocated away from central business districts, at least at the beginning of the pandemic, also influencing office space demand. As acceptance of remote work increased, both employers and workers not tied to a physical office location gained employment and talent-search opportunities beyond their local markets. This, too, has influenced the demand for office space.

The Columbus area's overall office vacancy rate was more than 23 percent in the third quarter of 2021, according to Cushman & Wakefield. That vacancy figure includes more than 1 million square feet of sublease space but does not include offices leased but underutilized – or not used at all – because of employees working from home.

As these vacancy rates and over-abundant sublease inventory demonstrate, there is a disconnect between the space that office tenants are currently leasing and their actual real estate needs. As leases expire, it will not be surprising to see tenants renegotiate for smaller footprints and shorter durations as they adjust to their changing requirements.

The shrinking need for office space is not limited to markets with dense populations and public transit commuters. In fact, these trends reverberate in suburban markets. Multiple large suburban office buildings in the Cleveland area, together totaling almost two million square feet, were 75 percent empty in the fall of 2021 because of employees working remotely.

This suggests that property tax assessments may be based on outdated lease information. Accurate valuation of office properties for taxation will require proper consideration of lease renewals and related activity. In reviewing assessments, it will be critical to scrutinize any older sale transactions assessors used for comparison that were based on pre-pandemic leases.

Positive signs are emerging for the commercial real estate market overall. Bloomberg recently reported that domestic U.S. travel for the year-end holidays is expected to be near pre-pandemic levels. Downtown foot traffic, hotel stays, and visitor counts have been climbing back from the lows seen early in the pandemic.

Despite this good news, office properties face persistent challenges. Recently, Marcus & Millichap reported that the office sector was one of the only property types lagging in 2021 commercial real estate transaction volume compared to the same time in 2019. (The other was medical office.) Flexibility on the part of both tenants and owners will be key in riding out the continuing waves of lease maturities and renewals in this changing market.

Since assessors are often using lagging data in their assessments, attention to the continued effects of COVID on office properties will be vital to ensuring that property tax valuations reflect a property's fair market value. Remember, too, that various assessors are treating COVID effects differently, so as always, it is wise for property owners to consult with experts familiar with assessment law and appraisal practice in their local jurisdictions. With careful observation of market changes, strategic planning and review with trusted tax experts, taxpayers can help ensure that their real estate tax burden is fair.

A recent order from the Ohio Board of Tax Appeals highlights a troubling aspect of real property tax valuation in the Buckeye State, where school districts wield extraordinary authority to influence assessments. In this instance, courts allowed a district to demand a taxpayer's confidential business data, which it can now use to support its own case for an assessment increase.

Ohio is one of the few states that permit school districts to participate in the tax valuation process, allowing a district to file its own complaint to increase the value of a parcel of real estate, and permitting a school district to argue against a property owner that seeks to lower the taxable valuation of a parcel of real estate.

Steve Nowak, Siegel Jennings Co.

Generally, school districts looking to increase tax revenue will review recent property sales for opportunities to seek assessment increases. Likely candidates for an increase complaint include real estate that changed hands at a purchase price or transfer value that exceeds the county assessor's valuation. That is not always the case, however.

In the case that gave rise to this article, there was no recent sale of the subject property, which is a multi-story apartment building. The apartment building owner had done nothing to draw any assessor's attention to their property in recent years — it had not been listed for sale, for example, nor had the owner recently refinanced the property.

Blind assertions

In the apartment building case, the school district filed a complaint to increase the county's valuation from $3.85 million to $4.63 million. At the local county board of revision hearing on the school district's complaint, the school district failed to present any competent and probative evidence that the apartment complex was undervalued as currently assessed.

The school district could not present evidence of a recent sale because there had been no sale. The school district also failed to present an independent appraisal witness to testify that the apartment complex was undervalued. Not surprisingly, the county board denied the school district's request to increase the valuation of the subject property.

This is where things got tough for the property owner, and where other Ohio taxpayers may face similar dilemmas. Having received the county board's denial of its complaint, the school district filed an appeal to the Ohio Board of Tax Appeals (BTA) to relitigate its argument that the apartment complex was undervalued.

Once a case is appealed to the BTA, the parties to the case obtain the right to conduct discovery. This is a process intended to help parties in a legal disagreement to "discover" or learn the case and evidence the opposing side may present against them.

Here, as part of its discovery requests, the school district asked that the property owner provide directly to the school district copies of rent rolls, income and expense information and other business records.

Not wanting to turn over such sensitive information, the property owner filed a motion for protective order and requested the BTA deny the school district's prying requests into the day-to-day operations of the apartment building's financial performance. Because discovery is granted as a matter of right on appeal and the threshold for discovery requests is fairly low, the BTA denied the property owner's request for a protective order.

Facing what it believed to be an unconstitutional infringement of its right to privacy, the property owner appealed the BTA's decision denying the request for a protective order to the next appellate level. The taxpayer laid out its arguments of why the school board's baseless complaint seeking to increase the property owner's valuation was unconstitutional.

The appellate court was unmoved, however, and issued a short order upholding the BTA's decision denying the property owner's motion for protective order.

Private data shared

Faced with the appellate court's order, the apartment building property owner was left with no choice but to turn over to the school district years of rent rolls and years of income and expense records for the property. The school district then provided the property owner's own confidential and sensitive business information to the district's appraiser.

Thus, after failing to produce sufficient supporting evidence of its original valuation assertions, the very evidence the school district will now rely upon to increase the property owner's real estate valuation (and tax bill) will have been provided by the property owner itself.

Cases like the one outlined above illustrate the unfettered discretion that school boards have in deciding on what properties to seek increased valuations. This puts Ohio real estate owners' rights at risk, and needs to be responsibly and reasonably curtailed.

The right to appeal property tax assessments may be more important than ever in the wake of COVID- 19. Despite the pandemic's disastrous and continuing effects on the value of many classes of real estate, some property owners saw tax assessments increase dramatically in 2021 and fear 2022 will bring additional increases.

What is the Value, Anyway?

When property owners receive their 2022 assessments, their first step should be to determine whether the valuation is, indeed, excessive. The right to appeal an assessment does not mean that an appeal is always prudent, so carefully analyze your property's performance in the context of the current valuation.

For example, suppose you own a mid-size, multitenant office property outside of Austin, Texas. Market vacancy rates increased to 20% in the fourth quarter of 2021 from 12% at year-end 2020, but asking market rents increased 10% in that time. Your office property fared better than the general market and only increased its vacancy to 5% when one small tenant did not renew its short-term lease.

The property's in-place rental rates were unaffected and unpaid rent from tenants at year-end 2021 was minimal. The property's assessment for 2022 indicates a 20% decrease from the previous assessment.

Although there are many additional circumstances to consider, in this scenario, it may be best to forego an appeal.

In many cases, however, property owners may see dramatic jumps in assessments for 2022 that do not reflect actual property performance and market fundamentals. Taxpayers and assessors alike are seeking how best to analyze the value implications of the past 18 months on different property types going forward.

Vacancy levels have affected individual office properties quite distinctly, and pandemic performance seems to be largely influenced by market location, tenant mix, and landlords' flexibility in negotiating lease terms moving forward.

An Uncertain Future for Office

The office market has suffered from continuing uncertainty despite a recovery in jobs. According to Cushman & Wakefield's Q2 Office Market Beat report, "even as occupiers increasingly clarify post- pandemic future workforce policies and set targets for employees to return the office, leasing activity has remained below pre-pandemic levels."

Moving into the fourth quarter of 2021, there is uncertainty among employers as to what return-to- office policies will even look like. Resurgence of COVID-19 cases in many markets, as well as dramatic shifts in labor preferences during historically high rates of workforce migration, have forced many employers to reconsider or delay their initial return-to-office policies.

Delivery of office product that began construction before the pandemic exacerbates vacancy woes. Cushman & Wakefield reported that, as of the second quarter of 2021, "more office space was delivered in each of the past three quarters than any other quarter in the past three years except Q4 2019."

However, vacancy levels have affected individual office properties quite distinctly, and pandemic performance seems to be largely influenced by market location, tenant mix, and landlords' flexibility in negotiating lease terms moving forward.

An Insider's Perspective on Value

But taxpayers can take certain measures to get a fair shake on their tax assessments.

Diminishing tax liability may offer a silver lining amid a horror show of declining property values playing out for owners of silver screen properties across the nation. Many theater owners will pay more than their fair share in property taxes, however, unless and until they educate local tax assessors of the sinister influences that oppress their businesses.

Movie theaters have been one of the hardest-hit industries during the COVID-19 pandemic. Spaces where the big screen once lit the faces of attentive viewers fell dark and silent, to sit lifeless for months. Studios released only 23 films in 2020, the fewest since 2003, and box offices sold less than 225 million tickets (see chart, Annual Ticket Sales Plummet).

As regulations eased, cinemas emerged far behind the pack of other businesses in a race to resume normal operations. Now, most states are allowing 100% occupancy in movie theaters; however, this does not mean movie-goers are rushing back to theaters. What is there to attract them? Some of the most anticipated new movies had their 2020 premiere dates pushed to middle or late 2021, with some even transitioning directly to streaming platforms like HBO.

On top of the lack of content, theaters are wrestling with new consumer preferences developed during quarantine. Streaming services such as Netflix and Hulu posed a threat to in-person cinemas long before COVID-19 ever indirectly accelerated the preference for home movie viewing. On the flipside, drive-in theaters saw an uptick in attendance during the pandemic, showing that consumers still enjoy watching a movie in an atmosphere specifically tailored for films.

While most industries are asking "Where do we go from here?" the big question for real estate professionals is "How does this shift in the economy affect property value?" As for movie theaters, there seems to be an opinion divide between optimistic hope for a rebound and a pessimistic expectation for further decline.

Cinemas were already difficult to value because of their unique usage and a lack of comparable transaction data across the country; now, weak ticket sales give appraisers and tax assessors a bigger hurdle in valuing movie theaters. Theater amenities are evolving to match consumer demand with reclinable chairs, full dining and drinking experiences, and higher-quality digital screening. Older theaters face design issues that deter conversion to modern cinemas. As a result, the total number of theaters in the United States has decreased by over 25% since the late 1990s (see chart, A Quarter-Century Contraction).

Theaters also present red flags to investors seeking properties for conversion to other commercial uses. Most theaters are constructed with sloped floors and high ceilings, for example. While those conditions are ideal for audiences to enjoy a film, few businesses would find those characteristics appealing for their own use. Most organizations would consider those building features detrimental and deduct the cost to remove them from the purchase price.

This illustrates a re-use utility issue with movie theaters – not many enterprises can utilize the real estate efficiently as is. To an investor in any industry outside of cinema or live entertainment, modifications to the theater would be required to make the space usable, decreasing the price that they would pay to purchase the building. The appraisal industry describes this as a Highest and Best Use issue, because a movie theater is arguably not the most efficient or profitable use of the space.

An investor would expect the property to require a large and costly conversion to make the space suitable for its most efficient and profitable use. These renovations would entail many risks. Movie theaters tend to be a riskier investment in general due to the specialization of the industry, but adding on the unknowns of transitioning the building to a more efficient use increases the risk to an investor.

Give Assessors the Facts

A theater owner should be aware of these issues when reviewing their property tax assessments. As county assessors value buildings using mass appraisal methods or software, they are unlikely to consider all the pressing issues that cinema owners face.

While a shift in the current market is inevitable, not all hope is lost in the movie theater industry. In an article by Bloomberg CityLab, K.C. Conway, chief economist of the CCIM Institute, shared some promising opportunities for the reuse of outdated theaters. As Conway observes, adaptive reuse can create affordable housing, reduce blight, and put old retail stores back on the property tax rolls. Some of the adaptive reuse opportunities already put into action include turning former cinemas into offices, e-commerce warehouses, and fulfillment centers. In Goodyear, Arizona, a nine-screen theater was repurposed to serve as the Arizona Department of Transportation's headquarters and Motor Vehicles Division office.

Although adaptive reuse offers some opportunities to reduce the number of vacant, outdated movie theaters in the market, the industry will still have a fundamental supply and demand problem – the supply of movie theaters surpasses the demand from moviegoers, operators, and investors. Changes in movie viewing preferences were already in motion when COVID-19 accelerated those trends.

As many outmoded movie theaters currently sit, physical obsolescence inhibits their transitioning either to a modern cinema or to a new use. The theater industry will continue to face obstacles, including finding investors to take on the risk of purchasing vacant theaters. And owners must educate tax assessors using factual information to demonstrate the profound decline in market value that some movie theaters have sustained.

 Molly Luhrs is an intern with Popp Hutcheson PLLC and a graduate student at Texas A&M University's Master of Real Estate program. Popp Hutcheson PLLC focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. 

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.

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.

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.

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.

Judith Viorst, author of the children's book Alexander and the Terrible, Horrible, No Good, Very Bad Day, had nothing on 2020. By virtually every metric, 2020 was a terrible, horrible, no good, very bad year.

Most states have some sort of catastrophe exemption for a property tax abatement or reduction tied to a defined disaster event. These statutes are state-specific, however, and few states had authority to address whether a property had to have sustained physical damage to qualify for catastrophe relief on property taxes.

Most states, including Texas, eventually concluded that some form of physical damage was necessary for property values to be reduced following a disaster. Its neighbor, Louisiana, went the other direction, concluding that its disaster statute did not require physical damage, only that the property be inoperable due to a declaration of emergency by the governor. Accordingly, property values for the 2020 tax year could be reduced in Louisiana due to COVID-19-related economic losses.

Pandemic paper trails

Fortunately, 2021 gives all taxpayers a fresh start. Most states use Jan. 1 as the "lien date," or valuation date for determining fair market value of property subject to ad valorem tax. For income-producing properties, taxpayers now have a full year's documentation of COVID-19 impacts, which more accurately demonstrate the fair market value of their properties in the current, COVID-19 economic climate. At a high level, such documentation may include financial statements with year-over-year and month-over-month comparison of revenues to expenses and profits to losses.

Drilling down, taxpayers should be able to demonstrate the source of these changing numbers, such as reduced employee hours, decreased production outputs and sales, unoccupied rooms, canceled conferences and the like. Comparable sales information should also now be available.

This information generally relates to economic obsolescence, which is a loss in value due to causes outside the property and which are not included in physical depreciation. Taxpayers also must consider whether their property exhibits functional obsolescence, or a loss in value due to the property's lack of utility or desirability.

Functionality is tied to a property's amenities, layout and current technology. A property's functional obsolescence is measured through reduced or impaired use. Taxpayers can quantify the lack of use in 2020 and compare it to pre-2020 capacity and usage in arguing for a reduction in taxable value.

Value and evolving utility

Historical information is key to the taxpayer's case — as is evidence of adaptation to current market trends. For instance, a year ago, who would have imagined that neighborhood and big-box stores of all stripes would start delivering their products directly to customers' homes? Suddenly, abundant check-out lanes, wide aisles, sampling stations and sprawling parking lots are unnecessary. Retailers would rather have drive-thru lanes and dedicated carryout parking.

Hotels have been similarly affected. Traditional amenities such as atriums, event space and intimate lounges that preclude safe social distancing are passé. Motels with open-air access are enjoying a renaissance. Resourceful restauranteurs have figured out how to make street-side dining desirable. Patios are now essential. While many of these changes in use are likely temporary, some are expected to be longer-lasting.

Consider commercial office space. Prior to the pandemic, many office-using employers permitted only limited remote work but working from home has now become the new normal. Facility planners expect the traditional office environment to shift to a hybrid model, with expanded remote working, office-sharing, and fewer in-person communications. Large conference rooms are out and state-of-the-art multimedia systems have taken their place.

These trends impact real estate values because they affect how property is used, or more importantly, not used. Commercial real estate developers will not be laying out offices the same way they used to, and hoteliers will not be building out the same large conference centers post-COVID. And the reality is that much existing buildout, furniture and equipment is going unused. So for now, a replacement cost analysis is the most appropriate valuation method for those property types, because it reflects the functionality of the property and the fact that the property would not be rebuilt as is.

Of course, as more and more businesses adapt to post-pandemic market trends, the lack of utilization may be deemed industrywide rather than property specific. At that point, appraisers should treat the lost value as economic obsolescence, which is value losses stemming from factors occurring outside the property. In either case, taxpayers should be prepared to demonstrate the inutility of their property, and the cost of such inutility, to reduce taxable value.

Better than terrible

Whether or not 2021 is radically better than last year, at least taxpayers are now in a better position to show the adverse impact the pandemic has had on fair market values. And if that translates to lower ad valorem tax liabilities, then this decade is off to a very good start.

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.

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.