The Corporate Taxpayer’s Guide To Minimizing Commercial Property Taxes

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In fact, commercial real estate plays such an essential role in the current economy that it’s been named as a fourth asset class, along with stocks, bonds and cash.

A myriad of property owners nationwide have portfolios containing manufacturing, office, industrial, retail, flex, multi-family and other types of commercial real estate. Enterprise corporate portfolios might contain hundreds of assorted properties, while a small family-owned business might only own a few buildings necessary to deliver their goods and services. Regardless of size, they both have the same endgame in mind — to generate a profit.

What else do the buildings of mega corporations and small business owners have in common?

Property taxes: the only tax that requires expertise that your CFO, controller and CPA all lack.

Commercial property taxes are an unavoidable reality for all commercial property owners, no matter the type or number of buildings they own.

So what? Everyone pays property taxes. Why is this a concern to me and my business?

Here’s why: Property taxes are the largest cost — more than 40 percent — of corporate occupancy. They are the largest state/local tax a corporate owner pays. And more than 90% of commercial property owners — big corporations, investors and small business owners alike — overpay their commercial property taxes each year.

This e-book highlights the steps that commercial property taxpayers must take to decrease the risk of overpaying their property taxes and protect their bottom line.

Part 1 describes why aggressive and proactive commercial property tax management leads to year-over-year real property tax savings. Part 2 explains how to win commercial property tax appeals and achieve property tax savings.

Let’s put the commercial real estate market into context: It’s a $217 trillion global market, an amount 2.7 times the global gross domestic product (GDP). In the United States, the real estate market constitutes 13% of the annual GDP.

$15 trillion:Size of the U.S. commercial real estate industry

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Part 1: Commercial Property Taxes And You

Who’s Watching Over Your Commercial Property Taxes?Depending on your company’s size and organization, the responsibility for commercial property taxes could fall into just about anyone’s lap. A small business owner may take direct responsibility for reviewing assessments and paying real estate taxes, but it can be harder to delegate this responsibility in a large enterprise company.

Generally, anything related to taxes lands on the desk of the CFO or the controller, or on the desk of one of their direct reports. This makes sense until the CFO and his or her team realize they lack the expertise to manage property tax assessments, which are based on the market value of the assets and not corporate financials.

Sometimes corporate real estate executives or facility managers will receive the property tax assessments, but again, these individuals lack expertise in market value. The tax department is another logical resource, but they face the same problem as the CFO – the lack of expertise in figuring out market value, the basis of commercial property taxes.

Regardless of who’s in charge, most companies deal with commercial property taxes the same way: When the bill arrives, it’s sent to accounts payable, as long as the increase is “reasonable.” Taxes are paid and everybody waits to repeat the process next year. Scrutinizing and mastering the valuation of commercial property – the basis of these tax assessments – is time-consuming and just one more thing to add to someone’s to-do list.

What’s wrong with this picture?

First, property taxes are based on assessments that, by law, must reflect the fair market value of the property. If CFOs and others in charge of corporate real estate (CRE) don’t know what their individual properties are worth from a tax standpoint, they will need help.

Second, commercial property taxes are not a fixed business cost. The CRE market is never static; property values are always increasing or decreasing. Therefore, property tax assessments shouldn’t be static, either.

90%:Percentage of commercial property owners overpaying commercial property taxes

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The Truth About CRE In AmericaOver-assessment of commercial property is common in the United States, because taxing jurisdictions are mandated by law to use mass appraisals for property tax valuation. While mass appraisal is efficient, assessors don’t have the benefit of time to consider properties as unique and individual assets with specific market values.

In a jurisdiction with tens of thousands of properties, mass appraisal is the only practical way to assess property tax value. The sheer volume of properties in any given jurisdiction prevents the assessor’s office from looking at every asset individually. This means that variables specific to a property, such as obsolescence exhibited by deficiencies and inadequacies, aren’t factored into the tax value assessment.

Most taxing jurisdictions operate under an information and resource deficit. Without the resources to measure all forms of depreciation or the funds to pay for expensive real-time market subscription data services, jurisdictions simply don’t have the time or tools to determine the true tax value of every property.

Overall, property tax assessments aren’t immediately reactive to the CRE market. In some extreme cases, jurisdictions without mandatory reassessment schedules have not lowered property taxes since before the U.S. economy crashed in 2008, despite significant changes up and down during that period.

While no jurisdiction in the United States was insulated from the Great Recession, during which commercial property values dropped around 40 percent across the nation, the market has recovered for many property types. In the years following the recent recession, the price of some property classes rose 18% above the pre-recession prices of 2007, and are now poised to level off or even start to decline again as supply starts to exceed demand.

By taking a strategic, knowledge-driven approach to your commercial property portfolio, you’re able to achieve real property tax savings through property tax appeals and abatements.

The Current And Future State Of Corporate Real EstateAccording to a Forbes survey of 201 senior executives from corporate real estate management companies, brokers, investors, financing executives and attorneys, “more than half, 52%, of respondents believe that their segment of the market is either strong or very strong.”

Going forward, experts predict changes in two areas. First, as the industry continues to recover from the lows of 2008 and 2009, technology will play an increasingly important role in the future of commercial real estate. A number of trends are easily identified, the foremost being a digital-dependent and real-time marketplace.

Property taxes are the largest cost — more than 40 percent — of corporate occupancy

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This is evidenced in many ways as corporate owners try to right-size their portfolios based on changes in their workforce and their customers. Our workforce is now mobile and no longer showing up to the office every day. Companies like Amazon and Tesla have changed customers’ expectations and challenged the way we do business.

The other area of change is the fundamental business model. John Clark, a program director at IBM, partnered in a recent CRE study with the firm CFO Research. He concludes that business fundamentals are shifting.

“The business agenda has shifted. We have exited the era of cost containment and cost reduction,” Clark said in an article in CoreNet Global’s magazine, The Leader. “A majority of organizations are now fueling up for growth in their respective industries, and I think that brings a new set of challenges for corporate real estate.”

The challenges Clark alludes to include preparing for growth and the continuing pressure to cut costs. Managing commercial property taxes directly impacts both challenges, and proactive management can help ensure success.

A Failure To Be ProactiveMost businesses aren’t proactively managing and appealing their commercial property taxes. This results in consistent property tax overpayment, with the average U.S. company overpaying its commercial property taxes by 31%.

If your organization is just cutting a check to the jurisdiction and sticking it in the mail every year, you are potentially overpaying hundreds of thousands of dollars (if not more) and paying more than your fair share.

Adding more properties to your commercial real estate portfolio only increases the pressure to cut costs. Savvy executives take advantage of every opportunity to negotiate the best possible deal, but their due diligence rarely includes an analysis of property taxes as the largest cost of occupancy.

However, commercial property tax savings don’t just appear. It takes time and resources to investigate and figure out what your property tax assessment should be. You’ll also need fluency in a complicated, quasi-legal, deadline-based commercial property tax appeal process. Plus, if you own property nationwide, you’ll need an intimate understanding of the requirements of each of the local taxing jurisdictions involved.

If it sounds hard, that’s because it is. But appealing and reducing commercial property taxes is a possibility for nearly everyone.

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Not All Property Tax Management Is EqualThere’s managing commercial property taxes, and there’s managing them well.

Even among businesses that do manage their property taxes (or outsource the task), missed savings opportunities are common.

For example, a 1-million-square-foot manufacturing facility near Dallas shaved about $20,000 off its tax bill. While that was nice, imagine how the owners felt upon learning they could have saved significantly more. After partnering with RPTA’s property tax management team, the manufacturer secured an additional $60,000 in tax savings.

In 2014, when the oil and gas markets plummeted due to oversupply, many industry suppliers faced a financial bind. A major Midwestern steel manufacturer that makes parts for the industry engaged RPTA to manage its real and personal property assets as part of an overall cost reduction initiative and reorganization in the wake of the fallout.

The county assessed the manufacturer’s property at almost $40 million. RPTA’s internal valuation of the real estate came to $27.5 million for three plants, totaling 4 million square feet of space. An additional independent appraisal came in at $27.7 million. RPTA’s testimony to the board of assessors in 2016 resulted in their confirmation of taxable value at $27.7 million.

The client received almost $300,000 in tax refunds for the first year. The agreement also stipulated that the value would be adopted for the next three-year assessment period, securing another $900,000 in savings, for a $1.2M reduction in operating expenses.

Part 2: How To Minimize Commercial Property Taxes

31%:Average U.S. commercial property tax overpayment

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Huge Savings Hide In Other PropertiesAbout 90% of average U.S. commercial properties are over-assessed. It’s likely that if you have one property to appeal in your portfolio, you have others. Don’t fail to identify potential savings on all of your properties.

For example, let’s say your property portfolio contains 43 assets. If you win commercial property tax appeals on your three biggest properties and stop there, you have not maximized your potential property tax savings.

Here are some key points to remember whether you’re managing commercial property taxes on your own or hiring a professional firm to manage your portfolio on your behalf, year-after-year.

1) Look at the entire portfolio: Truly successful commercial property tax management takes the entire portfolio into account to eliminate risk. It’s tempting to cherry-pick top-dollar assets and spend the most time managing those, but effective commercial property tax management strategies encompass the entire property portfolio.

2) Review your portfolio annually: Change is inevitable and often affects the tax value of commercial property. The occupancy of an office building in your portfolio could decrease by 20% in a year. Or perhaps you built your headquarters as a highly specialized property to meet your company’s needs, knowing you will never recoup your cost because no one else will ever need a property like this. In both cases, there are legitimate arguments, supported by data and value analysis, that justify the reduction of the assessed value, resulting in tax relief for you.

3) Not every property is worth pursuing: While it’s essential to examine the tax value of each property in your portfolio annually, you don’t necessarily need to take action on every asset. Occasionally, taxing jurisdictions unwittingly under-assess a property. In such situations, there’s an implied savings and you should keep quiet and pay the bill.

Remember, when you file an appeal, both parties have the right to review the current assessment, which could lead to the risk of a higher assessment. You can manage that risk by knowing the market, the law and the quirks of the jurisdiction.

4) The law is on your side: Local taxing authorities are obligated to tax you fairly, but they’re not obligated to help you determine if you’re being overtaxed. Remember, state law states that you don’t need to pay more than your fair share of property taxes. When you add a solid presentation of your argument, supported by research and data, it’s hard for a jurisdiction to deny the merits of the appeal.

Truly successful commercial property tax management takes the entire portfolio into account.

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The Nuts And Bolts Of Property Tax Appeals To know if you should file a commercial property tax appeal, start by determining whether your property has been assessed at fair market value of the fee simple interest.

This means establishing whether the local tax assessors have assessed your property as if it were available on the open market for sale or lease as of the lien date (usually January 1).

What’s key is fair market value of the fee simple interest. With few exceptions, commercial property tax assessments are calculated based on an analysis of comparable sales to derive a sales price per square foot, or using a market rental rate determined by current deals.

Calculating the fair market value of the fee simple interest takes quite a bit of effort and research. The taxing jurisdiction should go through this process each time your property tax value is assessed, but that doesn’t always happen.

Unfortunately for property owners, determining whether a property is properly assessed requires more than making a phone call. You’ll need to do your research, gather data from multiple sources and verify transactions in order to determine whether the current assessment represents fair market value.

If your property is not assessed at fair market value, you’re in a position to file a commercial property tax appeal.

How To File A Commercial Property Tax AppealBefore you prepare to file a commercial property tax appeal, examine the weaknesses in the jurisdiction’s assessment by reviewing the assessment notice and the county record cards. Design a strategy to tackle each weakness and position your data as the correct value. Don’t file an appeal if you’re not confident that you’ll win.

Filing an appeal requires accuracy and strict adherence to tight deadlines. Begin by getting the critical due dates for each property and jurisdiction onto your calendar.

Next, you’ll have to collect more information from the jurisdictions where you’re appealing. Start by finding answers to these questions:

• When is the deadline for appeals?

• Are you required by law to engage an attorney or an appraiser as part of the appeal process?

• Do you have the option to file your appeal electronically?

• What must be included with your appeal in order for the jurisdiction to accept it?

18%:Percentage that current CRE prices have risen over pre-recession 2007 prices

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Once you’ve filed an appeal, ensure you have proof of receipt so you know the jurisdiction received your documents on time. This is critical, because jurisdictions will reject your appeal if it’s even one second late or filed incorrectly. You must be able to prove your documents were filed on time, because there is no forgiveness in property tax appeals.

Also, make sure you know whether the jurisdiction requires an appeal to be postmarked by a certain date, or whether it must be received by a certain date.

Once you’ve filed an appeal, the work’s not over. Here are the next steps:

1) Be ready to collect more data: After you’ve filed the appeal, appoint someone to follow up with the jurisdiction regularly to determine when your hearing date will be. Find out if or when the jurisdiction will request additional data from you.

Don’t underestimate the amount of data a jurisdiction will ask you for or how frequently they’ll request the same information. It may take you days to compile the data for one request. If you have multiple appeals, make sure your team is prepared to handle a large influx of data requests.

Additionally, don’t simply collect and hand over the data that’s asked of you. Never give more than the jurisdiction asks for, unless it further supports your case. Everything that you send is evidence, and you don’t want to give the assessor anything that can be used against you. Present your data in the way that’s most advantageous to your case.

2) Stay in the loop: Manage your appeal to ensure it’s being processed. Sometimes tax appeals are submitted on time and then languish within the assessor’s office for months, or even years. Have someone check in with the assessor periodically to track your appeal. After you’ve confirmed that your appeal is moving through the system, find out whether you’ll be able to negotiate your appeal informally or whether you will have to appear before a board hearing.

3) Prepare for the hearing: Tax appeal boards typically consist of three to eight officials assigned to hear your case against the local taxing authority. In almost every jurisdiction in the United States, you’ll only have 15 to 30 minutes to make your case. That’s not a lot of time. What are you going to say? How are you going to say it? What’s your strategy?

One effective strategy employs the KISS principle. KISS is an acronym for “Keep it simple, stupid,” and it serves you well when appealing commercial property taxes.

Prepare for the hearing. In most jurisdictions in the United States, you’ll only have

15 to 30 minutes to make your case.

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Prior to attending the hearing, find out the jurisdiction’s protocol – is the format simple, with each side presenting its data and conclusions? Or is it a quasi-judicial format, with the hearing recorded, and strict rules for the order of presentation, cross-examination, rebuttal and closing?

Go to the hearing with a case fully prepared, but highlight the two or three most important points in your case and reemphasize them as often as possible.

In advance of the hearing, find out whether you’ll have the opportunity to cross-examine the appraiser and whether the appraiser will be questioning you. Think about the questions the appraiser will ask you and prepare your responses thoughtfully. Review the assessor’s evidence and prepare to ask effective questions. You, as the taxpayer, have the burden of proof, so you must have an in-depth understanding of corporate property values, value influencers and the tax law.

The best possible outcome after a hearing is for the taxing authority to accept your tax value. In this case, you leave with the confirming paperwork and the jurisdiction sends a tax refund check or credits your tax bill.

But you may not receive the results of your case the same day you make your argument. Once you’ve presented your case, be prepared to follow up – aggressively if necessary – with the jurisdiction. This is your money, so do what’s necessary to get it back where it belongs.

Playing HardballAfter the hearing, you may not be satisfied with the results. At this point, you may need to take your case to the next level, generally a court of law. Always vet your team to make sure there are no conflicts of interest with the opposing side.

You won’t necessarily be going to court and battling it out with the taxing authority. The courtroom is the last resort in a property tax appeal; when a property tax appeal goes to court, nobody wins. But sometimes you may need to hire an attorney and file for litigation to make it clear that you’re serious about your case. Don’t be afraid to fight for what is right.

As you see, a successful commercial property tax appeal isn’t as simple as walking into the assessor’s office, telling them you think you’re over-assessed and walking out with a refund.

Local taxing authorities are obligated to tax you fairly, but they’re not obligated to help you determine if you’re being overtaxed.

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Keeping Property Taxes Minimized Year After YearWith good data analysis and honed presentation skills backing you up, you are well positioned to win a commercial property tax appeal.

However, by now you’ve probably gathered that it takes a lot of time, planning, resources and commercial property tax knowledge to successfully make your case and win.

In the business world, it makes sense to focus on what you do best and to outsource business functions that are not your expertise.

Just as businesses rely on outsourced services for payroll, IT, HR and facility management, it makes sense for you to consider saving money and time by outsourcing your property tax management to qualified property tax consultants.

If you explore options for professional property tax management, look for a consultant who has success with clients similar to you and whose success is built on transparency, client communication and valuation expertise. You want to avoid a consultant who will simply cherry-pick through your portfolio for the biggest and easiest properties to appeal. Find a partner dedicated to providing an aggregated service, one that looks at your entire commercial property portfolio year after year and eliminates the risk of higher property taxes hitting your bottom line.

The best commercial property tax consultants know this game is a marathon, not a sprint. Align your organization with a consultant who understands the system and is willing to put in the hard work necessary over time to earn you the maximum property tax savings.

Avoid partnering with anyone who lacks actual valuation expertise in real and personal property. You need someone with a proven record of winning appeals and experience working with taxing jurisdictions in all 50 states, and who has a documented process to manage multi-state portfolios. This expertise is critical; it is not a good sign if your consultant calls you the day before an appeal is due and asks for a mountain of documentation required to be filed with your case.

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Act Fast To Avoid Paying More Than Your Fair Share » Contact RPTA Today To Fight Your Property Tax Increase

Final ThoughtsIt’s easy to think that successful property tax management is like stepping into the ring and winning a fight. It’s an effective simile, but its sentiment is misguided. Property tax assessors are not your enemy – they just lack the resources, time and data to be truly on your side.

If you’re able to provide tax assessors with data they don’t have access to, or information they don’t have the time to collect, it is a matter of convincing them to take your side, rather than winning a fight.

Real property tax management is about helping the local tax assessors get the information and data they need to ensure you’re not paying more than your fair share of taxes.

Remember, the law is always on your side. When the data is on your side as well, it’s hard to lose a property tax appeal.

Real Property Tax Advisors (RPTA) is committed to improving your bottom line by managing the risk of property taxes. For more than 40 years, RPTA has dedicated itself to achieving an unparalleled success in managing complex property tax portfolios. To date, we’ve saved our clients hundreds of millions of dollars in commercial real estate and personal property taxes across a variety of industries, including commercial, industrial and manufacturing. RPTA represents clients in all 50 states and manages over 80 million square feet. RPTA is headquartered in Atlanta with offices in St. Louis and Chicago.