As renewable energy assets become more prevalent in commercial real estate portfolios – especially among industrial and data center users – property owners face a critical challenge: ensuring that intangible assets are not mistakenly included in the taxable value of real and personal property.

Wind farms, solar installations, battery energy storage systems and nuclear facilities often involve complex ownership structures and revenue models. While these facilities are physically tangible, much of their value derives from intangible elements such as power purchase agreements, state and federal tax incentives including investment tax credits and production tax credits, software and regulatory rights. Misclassifying these intangibles as taxable property can result in inflated assessments and unfair tax burdens.

Most state property tax systems are designed to assess only tangible property, namely land, buildings and physical equipment. Intangible assets, such as contractual rights or intellectual property, are generally exempt. However, in practice, the line between tangible and intangible value can blur, especially when assessors rely on valuation methods that do not clearly separate the two.

For example, values calculated using the cost approach may include development premiums or acquisition expenses that reflect intangible value. Add to that federal tax incentives that can provide up to a 30% credit for development costs. When assessors fail to exclude any or all of these elements from transaction comparisons or a final assessments, their conclusions will skew high and produce inflated values. Similarly, the income approach will capture revenue streams tied to intangible assets, unless carefully adjusted.

In reviewing assessments on renewable energy projects, taxpayers should be on the lookout for any intangible components contributing to the assessor's valuation. Power purchase agreements, for example, are contracts that guarantee future revenue but are financial instruments, not physical assets.

Other examples include interconnection rights, because the ability to connect to the grid is often secured through regulatory approvals or agreements, not through tangible infrastructure. Likewise, software and control systems including proprietary algorithms and digital platforms used to manage energy production and storage are intangible.

Intangibles common to many commercial properties include cost of capital, as well as brand and developer reputation. Market trust and recognition may influence value but are not taxable property.

To ensure fair assessments, owners should adopt valuation strategies that clearly separate intangible value. Here are essential steps to include:

Disaggregate costs when using the cost approach. Break down construction costs from development premiums and intangible acquisition expenses.

Adjust for risk. In finance, the term "risk" refers to the ability to forecast the cash flows accurately. Both wind and solar cash flows are riskier than those of the electricity generating companies upon which assessors, and the appraisers they hire to defend their assessments, tend to rely to estimate a discount rate.

Review depreciation tables. Many assessor tables fail to reflect the rapid technological obsolescence of renewable assets or the non-depreciable nature of intangibles.

Identify economic or external obsolescence, which is something external to the property that limits its value. The most compelling evidence of economic obsolescence is insufficient income to justify the cost. The historical cost says little about what a property is worth today.

Adjust income models when applying the income approach to isolate the portion of net operating income attributable to tangible assets. This may involve modeling scenarios that exclude intangible inputs.

Document intangibles by providing contracts, licenses, regulatory filings or other clear evidence that demonstrates the presence and value of intangible property.

In many jurisdictions, statutes or case law explicitly prohibit the taxation of intangible property. Even where the law is less defined, taxpayers can often succeed by showing that assessors have included intangible value in their assessments.

Key strategies include arguing for valuation based on actual use rather than theoretical capacity, especially in underutilized facilities. Does the project use pollution controls? Identify exemptions or reduced assessments for equipment that mitigates environmental impact.

And finally, challenge the assessor's inclusion of any intangibles. Appeal assessments that include tax incentives, goodwill, assembled workforce, software or contractual rights as part of the taxable base.

As data centers and other high-demand users increasingly rely upon onsite renewable energy, understanding how to separate intangible value becomes essential. Accurate valuation not only ensures compliance with tax law but also protects property owners from excessive taxation.

Moreover, as renewable technologies evolve, so, too, must the appraisal methodologies used to assess them. Taxpayers must stay informed, adaptable and vigilant in distinguishing between what is taxable and what is not.

The rise of renewable energy in commercial real estate brings new complexity to property tax valuation. By applying disciplined appraisal techniques and understanding the legal boundaries of taxable property, owners can ensure fair assessments that reflect only the value of tangible assets. This approach supports both fiscal equity and the continued growth of sustainable infrastructure.

Office property owners should contest excessive assessments now, before a potential crisis drives up taxes.

The Great Recession, from December 2007 to June 2009, was the longest recession since World War II. It was also the deepest, with real gross domestic product (GDP) plummeting 4.3 percent from a peak in 2007 to its trough in 2009.

Entering that recession, unemployment was at an unalarming 5.0 percent, which is on par with historical averages, and interest rates hovered around 6 percent. The roots of the recession lurked at the intersection of risky subprime mortgages and the repeal of the Glass-Steagall Act, which allowed for the mega-mergers of banks and brokerages to escalate.

And here we are in January 2024, looking down a steep market slope. On the bright side, we are in a more advantageous position than at the beginning of the Great Recession. GDP was a respectable $25.46 trillion in 2022, up 19 percent from $21.38 trillion in 2019. Unemployment is at 3.7 percent, and values in the single-family housing market are increasing again, in part due to a lack of supply.

The investors standing on unstable ground this time around are those heavily leveraged in major metropolitan markets, such as New York, Chicago, and San Francisco, or other municipalities that rely on office values. (Think suburban office markets.) The sharp increase in interest rates under the Federal Reserve's tightening monetary policy, and the extreme drop in demand for commercial office space that accelerated during the pandemic, will have significant ramifications on all property types.

Dire developments

What ramifications? Assume a hypothetical "Metro City" that, like most major markets, has a tax base with 75 percent of its independent parcels classified as residential, and 25 percent as commercial real estate. However, the assessment values are strongly weighted on the commercial properties, with 30 percent of the entire assessment value born by office properties.

The municipality has a total tax levy of $16.7 billion and overall assessed property value of $83.1 billion. The office portion of the property makeup is 30 percent, or $24.9 billion in assessed value. The office share of the total tax levy is $5.0 billion.

Now assume that the city's overall office market value collapses by 50 percent. This leaves Metro City with a $2.5 billion deficit – not a small number. To recapture that $2.5 billion, the city must increase its tax rate by 15 percent. That means tax liability increases by 15 percent for every taxpayer, even if their property's assessed value is unchanged.

So, how can developers and owners protect themselves from excessive tax liability, given the current market conditions? One solution is to appeal property tax assessments aggressively. Regardless of the jurisdiction, regardless of property type, property owners must evaluate their opportunity for an assessment appeal.

Office-specific issues

Market transactions show vast valuation differences between Class A office properties, which are typically newer buildings with great amenities, versus "the others," or those office properties 10 or more years old and offering fewer amenities. Properties that fall in the latter category have many opportunities for assessment reductions. Here are key points to consider.

Ensure the appraiser or assessor is using the property's current, effective rental rates. In many instances, an owner will show a tenant's gross rent on the rent roll without disclosing specific lease terms contributing to effective rent. For example, the lease may have been negotiated at $27 per square foot, but the rent roll does not account for free rent, amortization, free parking or other amenities the tenant receives.

Additionally, although office leases historically pass through taxes and other costs to tenants, many negotiated leases now cap expenses for the tenant, potentially shifting a portion of expenses to the landlord. That is a key issue the taxpayer should address in the income analysis of an appeal, because it provides evidence for a reduction in effective rental rates, as well as an imputed increase a buyer would demand in the capitalization rate to reflect the additional risk.

Appraisers need to understand this issue for rental comparables as well as for the subject property. Typically, they will confirm public information posted by various data services, but if they lack the finer details of a transaction, the rates they derive could exceed the true market.

Address vacancy and shadow vacancy. Prior to the pandemic, office vacancy in most markets hovered between 5 percent and 14 percent, depending on the location and building class. As of the third quarter of 2023, vacancy is over 18 percent, according to CBRE.

In October 2023, CBRE reported that suburban Chicago's office vacancy rose 50 basis points to 25.9 percent in the third quarter. Manhattan's overall office vacancy rate including sublease offerings is 22.1 percent, according to Cushman & Wakefield.

Shadow vacancy, or space where the tenant is still paying rent but no one physically occupies the space, is the canary in the coalmine for an office building's future. If a building is 12 percent vacant, the assessor probably won't be sympathetic. But if the owner highlights that leases in the space expire in the next year or two, and/or they are large blocks of space, the assessor (or at least the owner's appraiser) should acknowledge that risk and apply a higher cap rate for the subject property.

Adjust for interest rates. Any investment-grade property is now worth less than it was two years ago, simply because of the rise in interest rates.

Because interest rates have increased significantly, the property owner can argue that the assessor should use the "band of investment" method, which calculates capitalization rates for the components of an investment to produce an overall cap rate by weighted average. This methodology takes into account not only the increase in market interest rates, but also equity demands of lenders. Interest rates have increased over 3 percentage points across the last 2 years, which in many cases equates to a 100 percent increase in interest rates.

Additionally, the equity requirements on commercial mortgages have increased from 30 percent to 50 percent. Increasing the base capitalization rate to reflect these changes in an income analysis will offer significant relief in the assessment.

Jurisdictions that rely heavily on office values to support overall assessment value in the tax base will be experiencing increasing tax rates. This increase in rate is factored into the loaded capitalization rate, which obviously means a lower market value for assessment purposes. Analysts and appraisers should review the increased rates annually.

The near term will be challenging for entities that invested in office properties prior to 2023, but the strategies outlined above can offer some protection in this stormy market.