• A View at 10,000 Feet in 2013
  • January 11, 2013
  • Law Firm: Faegre Baker Daniels - Minneapolis Office
  • Property Tax Overview

    The forces of the Great Recession continue to impact the local property tax environment. State and local government revenue collections suffer; intergovernmental transfer payments among federal, state and local government decline; and the certainty of future tax changes create broad instability for individuals, governments and businesses. Local governments are downsizing. The storm clouds of unfunded public pensions threaten the financial foundations of many states.

    Jurisdictions are looking for new revenue sources, and the obvious targets are sections of the economy that appear to be doing well. One very visible target is investment grade real estate. Record sales prices in many markets for Central Business District (CBD) office, storage facilities, high-end retail, manufactured housing parks and multifamily property types are well publicized. Speculative property developments are in discussions, and in some cases, breaking ground. Rental growth rates, especially for multifamily properties, have received extensive media coverage. Together, they create a bright target for jurisdictional assessors as a source of revenue in an otherwise reduced tax base.

    Most real estate professionals know that these visible signs are not necessarily indicators of a long-term market recovery and were created by other forces, including a low cost of capital, quality tenants and investor appetite for revenue streams. On the residential and Commercial Mortgage-Backed Security (CMBS) side, we know that the delayed movement for mark to market continues to inhibit reaching a true market equilibrium.

    2012 Predictions Realized:

    • Horizontal movement in assessment values for property types where market sales and revenue were flatĀ 
    • Market sales of apartments, Class A office (particularly in CBDs), high-end retail and self-storage properties drawing assessor attention and increases
    • Market transactions creating a bifurcation of cap rates based on asset quality and putting upward pressure on these and other asset classes
    • Complex assets (mixed use, manufacturing and processing), including infrequently traded assets, still seeking their initial low points, if not appealed
    • Assessors rarely giving reductions voluntarily for non-residential property, even if they know it is over assessed
    • Economic and political uncertainties creating instability

    2013 Predictions:

    • Increased documentation requirements in all valuation discussions
    • Jurisdictional focus on "media successful" property types
    • Increased participations in value discussions by non-assessors such as school districts and other levying authorities, including citizen boards
    • Increases in jurisdictions tracking trade publications, and in some cases, SEC filings and state filings to discover taxpayer information
    • Political appeal decisions pushing appeals to higher levels and costs
    • Appeals being dismissed for technical reasons, including signatures, date compliance, authorizations, disclosure, etc.
    • New taxes on the industry, including gross rents, licensing, use taxes, etc.
    • Increased exploration and potential filings for bankruptcy by cities, and potentially states, to escape overhead costs, including public pension
    • Increased numbers of buyers and sellers using purchase price allocations to separate non-assessable property in real estate transactions
    • Investment organizations looking to centralize and create transparency in the management of the tax function as taxes increase
    • Property tax reform demands by homeowners/voters looking for other revenue sources to reduce their property tax burden, sales tax, income tax, etc., as well as caps on values and rate changes
    • California looking seriously at a split tax roll, treating non-residential property owners differently in valuation and/or rate