The Key Term All Commercial Real Estate Owners Should Know

Property taxes can be a heavy financial burden, especially for owners of commercial real estate. Fortunately, property tax appeals provide an opportunity to reduce tax assessments which could lead to hundreds of thousands in savings. While filing an appeal is easy, winning one requires knowledge and expertise in valuation. Commercial real estate owners can increase their understanding in this area by learning one key term. Read on to learn what it is!

The Impact of Property Taxes on Commercial Real Estate 

Commercial property has withstood the test of time as a reliable vehicle for wealth creation. The Historical Value of Commercial Real Estate. Unfortunately, commercial property is often hit with heavy assessments. These reduce net operating income and affect profitability which can decrease real estate values. Property Taxes Driving Down Commercial Real Estate Values – CRE Daily. Owners of commercial real estate can avoid this by appealing their assessments.

As we will see, there are many factors that can impact fair market value, and some are often overlooked. Knowing these factors can give property owners a significant advantage when pursuing tax appeals.

Obsolescence: What it Is and How it is Relevant 

Obsolescence – now that’s a word you don’t hear every day.  In the context of real estate, it means a reduction in property value based upon some physical or other condition. There are two types of obsolescence: curable and incurable. Curable obsolescence can be remedied by the property owner. For instance, a commercial building with poor lighting can be renovated with LED fixtures, providing clear visibility at night. Incurable obsolescence, on the other hand, cannot be remedied by the property owner.

Why is this distinction important? A tax assessor won’t reduce a property’s assessment if damage to property value can be fixed. But if a property owner has no recourse, then the assessor will be more likely to reduce the assessment.

Examples of Incurable Obsolescence

There are many examples of incurable obsolescence, including:

Changes to Zoning Laws: Local governments can modify the permissible uses of a property through zoning changes. These can directly impact fair market value.

Eminent Domain:  Partial takings of property can affect the value of the remainder. For instance, if a portion of a gas station is taken blocking fuel trucks, the property’s highest and best use could be permanently altered, resulting in a lower fair market value.

Rerouting of Traffic: A change in traffic pattern can affect the value of commercial property, particularly for highway retail establishments. Less traffic means fewer potential customers passing by. Road closures and construction of new roads are significant and worth consideration.

Flight Pattern Changes: Increased overhead flight traffic can become a nuisance and can affect property value.

In situations like these, external factors outside the property owner’s control are to blame. These are the ideal conditions for a successful tax appeal because an assessor will be more likely to recognize a decrease in fair market value.

Methods of Valuing Commercial Real Estate

When valuing commercial real estate, assessors generally use one of three methods: the sales comparison approach, the income approach, or the cost approach. The sales comparison approach relies on sales of comparable properties, or properties that have similar features to the one under appeal. The income approach calculates fair market value based on a property’s income. The cost approach, while not as frequently used, is based on the cost to construct similar improvements, taking into account the value of the underlying land, construction costs, and depreciation. These methods try to answer one fundamental question: what would a willing buyer pay a willing seller for the property?

Regardless of which approach is used, it’s important to consider incurable obsolescence to ensure an accurate estimate of fair market value. An appraiser can estimate fair market value yet fail to account for external factors that are relevant. Sales of comparable properties may need to be adjusted depending on incurable obsolescence factors. Similarly, looking at income without considering external factors can lead to an inaccurate determination of fair market value. Finally, the cost approach can be especially problematic because relying on cost alone can lead to inaccurate valuations. Owners of commercial real estate can encourage tax assessors to consider incurable obsolescence by providing documentation of zoning changes, construction plans, maps, and anything that can feasibly impact fair market value.

Conclusion

Determining fair market value is a complicated task, and there isn’t a one size fits all approach. Since tax assessors are human, they don’t always account for all possible factors that affect fair market value. Pay attention to changes in zoning, traffic patterns, and other factors because these are often overlooked. And don’t forget the key term: incurable obsolescence.

If you are considering an appeal and are interested in speaking with an attorney experienced in handling property tax appeals, please reach out to us at info@mrod.law, or at 973-539-8900.