After you receive an assessment for your business/commercial property, you may find yourself questioning the amount—but also wondering if it’s worth the cost to appeal the property tax assessment. In many cases, particularly for companies experiencing technological or economic change, the answer is yes. But a property tax appeal doesn’t make sense for every piece of property. While the answer isn’t a simple yes or no, there are a few tips to help you determine whether or not it’s worth the cost to appeal your business property tax assessment.
How To Determine Whether To Appeal Your Property Tax Assessment
Run The Numbers
First, what are the costs associated with appealing your assessment? The primary cost associated with an appeal tends to be for reviewing the assessment to determine its accuracy and ultimately preparing an appeal for the selected properties. It’s generally not as simple as comparing the current year’s assessment to last year’s. To effectively determine whether or not you were overassessed, you can, however, perform some high-level valuation tests.
Of course, whether or not it’s worth the ultimate cost to appeal your assessment all depends on the property in question. Often it makes more sense to appeal larger, more valuable assets, whereas smaller assets may not be worth the time, energy, and cost of appealing. Below are just a couple of cost-effective ways to use as indicators as to whether you should appeal or not.
Income-Producing Commercial Buildings—Consider Changes In Income, Interest Rates, & Growth Rates
You can look at relative changes in lease rates and interest rates. If commercial borrowing rates are up and lease rates are flat or down, there’s a good chance the value of the property has declined. Interest rates have increased by almost 150 basis points (1.5%) from the low of 2016 to today as measured by 10-yr treasuries. Additionally, retail properties have exhibited declining revenues as the brick and mortar stores are struggling to compete with their online competitors. Over the past 12 months, rents in New York, Washington, and Boston declined between 0.4% and 1.4%, while rents were roughly flat in Chicago and San Francisco, according to data from CoStar Group. Alternatively, if you find that interest rates are down and lease rates are flat or up, the building’s value may have gone up. This has been the case over the last few years for many properties; now, interest rates have inched up, so be cautious about assuming your assessment is correct.
Finally, even if all else is constant (income and lending rates), slowing expected income growth rates can signal a decline in value. Flat or increasing interest rates and slowing expected growth rates result in higher cap rates. Cap rates are used to convert income into value, and higher rates generate lower values. While these indicators are helpful in determining if your commercial property is a candidate for an appeal, determining how much it’s up or down—and whether you are fairly assessed—will take a more detailed analysis.
For Business Personal Property—Consider Depreciation
Assessors use depreciation schedules to determine the value (and ultimately the tax) of business personal property. When you’re trying to figure out if it’s worth the cost to appeal your assessment, it’s helpful to consider how fast your property is depreciating and whether the schedules used by the assessor are keeping track.
If your property is rapidly depreciating, it may make more sense to appeal because irregularly high depreciation rates are rarely used in an assessor's initial valuation. If the assessed property is a fixed asset or a piece of equipment and you haven’t made any recent improvements to the property’s value, the value should decline year over year. Depreciation occurs for more reasons than just physical deterioration; it may also be the result of functional or technological reasons. Functional obsolescence occurs when an asset is impacted with operational inefficiencies when compared to its replaced substitute. For example, a diesel generator may be operating at a higher, less efficient heat rate when compared to a similar diesel generator thus the increased fuel cost makes the generator less valuable. Technological depreciation occurs when the technology of an asset becomes obsolete. For example, there may be a newer version of an asset available that is technically more functional (and sometimes even cheaper) than the old version.
If you’re trying to decide whether or not a business/commercial property tax appeal is worth the cost, property tax software can help you dig deeper. These systems can automatically depreciate assets over time, and take into account whether or not there have been any new investments in those assets or not. Filing returns in your property tax software also makes it easy to compare them against the assessor’s determined values. Technology allows for a significant amount of “what if” analysis by using different depreciation scales and lifespans for your assets. When an assessment isn’t clear, you can also use software to more easily deconstruct the assessor’s valuation methods. Often times, you can test different valuations using your property tax software and see if any match up to the assessor’s numbers.
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Prepare A Strong Case
If you do decide to appeal your property tax assessment, you’ll need to prepare a presentation and plead your case. If you are not equipped to do this then you will likely need to hire an experienced consultant to present on your behalf or to assist you. Fees, travel costs, and preparation cost (i.e. hiring an appraiser) will increase the cost of an appeal, so you will want to be confident your case is credible. Even so, depending on the complexity and size of the case, a board may defer the decision-making authority to a court of law. Focusing your resources on the more egregious assessments should be your strategy.
To assist you with these decisions, property tax software like TotalPropertyTax can help identify assessment reduction opportunities. It also provides easy access to rich data, allowing you to review and protest valuation differences, and simplifies the appeal process by including appeal forms in the software.