Commercial property owners may still reduce taxes based on COVID-era interest rate cuts, but that window may be closing.

The Federal Reserve finally delivered a much-needed reprieve for investors by lowering the federal funds rate by 0.5% on Sept. 5. This reduction is especially welcome after an extended period of rapid interest rate hikes. For commercial property owners, however, a window may be closing on the opportunity to reduce property tax assessments based on the low interest rates that reigned during the COVID-19 pandemic.

Mortgage rates have eased slightly this year from a peak in October 2023. The average 30-year mortgage rate reached a 23-year high of 7.79% the week ending Oct. 26, 2023, marking the end of its climb from a staggering historical low of 2.66% in December 2020, according to the Freddie Mac Primary Mortgage Market Survey.

This striking contrast is crucial for commercial property owners, particularly those who bought their properties between early 2020 and the summer of 2022. That's when historically low interest rates had the 30-year mortgage rate bouncing along as low as 2.10%.

An investor who purchased commercial real estate in this timeframe may still be enjoying a favorable mortgage rate locked with their acquisition. By the same token, the property tax assessment on that transaction might still reflect an inflated purchase price from those years, owing to the effect that ultra-low-cost debt was having on market pricing at the time.

Today, taxpayers in this position may be able to argue that current market conditions no longer support that valuation, providing an opportunity for an assessment reduction and tax savings.

Learn the law on assessments

A taxpayer deciding whether to appeal their assessment should begin with an understanding of the objectives and legalities governing the assessor's actions. Most jurisdictions assess property based on a percentage of its fair market value at a specific date, often Jan. 1 of the tax year.

Assessors frequently rely on market sales data to estimate value, giving significant weight to recent sales involving the subject property. But the sharp change in interest rates, coupled with stricter lending standards, recently has led to a significant slowdown in commercial real estate transactions.

Because the assessor relies on sales data, this lag in transaction activity means they may not fully capture the impact of today's financial environment on current pricing and property values. For taxpayers, this presents an exciting opportunity to argue for reduced assessments.

To successfully claim a reduction, it is critical for the taxpayer to understand how the assessor valued their property and how current market conditions differ from those at the time of acquisition. For instance, if the property is being taxed based on transaction values from 2020-2022, the taxpayer could reasonably argue that its worth has since decreased due to inflation, the rise in interest rates, and tightened lending standards.

In preparing arguments for a reduced assessment, the property owner should be ready to show how conditions and trends that drive commercial real estate value support their call for a lower valuation. Several key factors are weighing down real estate values today, including rising interest rates, inflation, elevated operational costs, and anemic rent growth.

Vacancy rates remain high across many commercial sectors and rent growth has slowed. Lenders are adhering to strict terms on allowable loan-to-value ratios, reserves and other requirements, even after the Federal Reserve's recent rate cut. The Federal Reserve's July 2024 Senior Loan Officer Opinion Survey reflects that tighter lending standards and limited demand for commercial real estate loans are still in effect.

Commercial property prices fell by 7% over the past year and are down 21% since March 2022, according to Green Street's Commercial Property Price Index. Taxpayers can leverage this valuation decline when seeking a property tax assessment reduction.

Show effects of change

When meeting with the assessor or tax review panel, demonstrate the property's decreased value by comparing the lending environment and market conditions from the time of purchase with those at the most recent assessment date. Additionally, present any other salient factors, like the inflationary pressure on insurance, maintenance, and operational costs. While rents may have risen, assess whether that increase is sustainable or inflated considering today's higher tenant improvement costs.

Taxpayers should decide whether they need third-party experts to support their case. An experienced appraiser can provide an objective valuation and serve as an expert witness if necessary.

Even taxpayers who believe they have a good grasp of their property's worth can benefit from the advice of a recognized third-party expert, who can strengthen their case by explaining and substantiating the data to the assessor. An appraiser who is educated about the local submarket and who can convey that knowledge in a format this is easily digestible will likely raise the chances of success.

The window is closing

This opportunity will not last long. The further removed the assessment year is from the low-interest-rate period associated with the property's inflated assessment, the less relevant those conditions will be in seeking and supporting a property tax reduction. Moreover, the longer a property's assessed value remains unchanged, the harder it becomes to argue for a reduction.

Taxpayers can increase their chances of success by working with knowledgeable local appraisers and advisers familiar with property tax law in the subject property's jurisdiction. Preparing for a possible trial will often lead to a favorable settlement before reaching that stage.

Taxpayers should seize this chance now to secure the tax savings they deserve, before the opportunity is gone.

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.