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Property Tax Appeals: The Impact on Government, Landlord, and Tenants

November 22, 2009

Over 1,000 San Francisco property owners have filed petitions with the City of San Francisco to have their property taxes reduced. The same is for virtually every other city as property prices have fell dramatically.

Jose Guevara is property manager for Crocker Galleria, which has requested a 62 percent reduction in its assessed value, from $370.3 million to $142 million. He said appealing the value was a no-brainer.

“Just read your own newspaper,” he said. “It’s a sign of the economic times. We turn it over to the experts, our tax attorneys, and they do their magic. A year later, we find out what the reality is.”

If you combine the residential applications, then over 4,000 property owners are appealing their property taxes. The combined reduction in value being sought is north of $11 billion dollars, translating into a $130M hit to the government. And the number will only increase as others read the article in the San Francisco Chronicle.

Assessing property taxes is nothing new, but is the prudent thing to do as a commercial property owner. The reason is that with rents having fallen, and competition for tenants increasing, having lower property taxes is necessary. You may be able to lower your asking rates, but if your operating expenses are high due to property taxes, it will ultimately reduce the competitiveness of your building.

There are buildings in Fremont for instance where the landlord needs to maintain a low asking rate to remain competitive because of their buy in late 2006 of the building, and subsequent high taxes. By lowering their property taxes, they may even be able to get more rents.

As a tenant, it is also smart to have language within your lease that forces the landlord to seek property tax reductions, particularly if you are an anchor or sole tenant. In addition, many office are gross leases and as such contain a provision whereby the tenant is responsible for increases over the base year expenses.

What happens when the operating expenses fall? That is why tenants should seek the benefit of decreases as well, otherwise a tenant may be responsible for increases over the base year, but not see any of the benefits that result from a decrease.

And back on the government for a second…this is partly why even a balanced budget can be thrown off a mere few months after being passed. What the government is given, the government will spend, and more. So raising taxes is merely a short term solution unless there is legislation that forces the government to build and maintain a rainy day fund which can only be used to offset a fall in property values and income taxes.

[via San Francisco Chronicle]

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