The Connection Between Lower Tax Revenue and a Reset of Real Estate Assets: #RethinkThe News

Introduction

In the past, we have spent considerable time discussing potential revenue shortfalls large cities will likely experience due to reductions in commercial property tax revenue. It is a logical argument, as shifting working patterns have, in the short term at least, lowered occupancy levels of office buildings. Those lower values will eventually yield lower assessment values, which then puts a strain on cities in terms of their ability to provide core services through the reductions in proptax.

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Thus far, this discussion has carried on at a high level, and we continue talking about the topic by drawing on anecdotes from several prominent North American cities to suggest the issue is somehow becoming normalized. Beyond this, we have not moved the discussion to a more granular level where we begin examining the variations in approach given the variability of policy within different jurisdictions.

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Our Commentary on an Altus Group Paper

In her latest paper ‘The property tax factor in the “urban doom loop” – who is really at risk?’, Sandi Prendergast, Senior Director within the Tax Practice at Altus Group does exactly this, as she dissects the core issues from several perspectives. As the title suggests, some fear the onset of a “doom loop” where occupancy reductions lower assessed values of office assets, which lowers the provision of critical city services, providing further impetus for downtown tenants to move out. This is somehow reminiscent of similar migrations that took place away from urban cores in large America cities in the 1960s, but in this case, an entirely different set of underlying factors are considered when formulating a longer-term view.  

For instance, on the one hand, there are ominous undertones to the discussion as it questions the viability of working in downtown cores. But somehow, an event of this magnitude provides the perfect opportunity to repurpose assets in a way that renews their long-term viability, which also considers the idea of use conversion from commercial to residential. The concept of an overall reset is also discussed, which involves landlords being able to capitalize on purchasing old assets for reduced prices and using the savings to make improvements to tired assets, thereby creating a new stock of rehabilitated space.

Sandi is thorough in describing the types of incentives different cities are offering portfolio owners in various cities to convert their assets into residential use (specific anecdotes are provided in the paper). But we are cautioned that this can have a pronounced impact on tax revenue, as commercial is assessed  much higher than residential.

What particularly stands out in this paper is the variability of approaches to doing assessments. While some jurisdictions will conduct annual assessments, others can actually do this over a number of years. Surprisingly, there is some interesting rationale behind the idea of avoiding annual assessments, given the lower volume of transactions, and hence data that can be used to calculate rates.

Ultimately, the paper lays out a perfect case study for the types of complexities faced by portfolio owners, especially if they need to manage assets and their associated property tax obligations across numerous jurisdictions. It is a process that can prove to be exhaustingly cumbersome in the absence of the right tools. It is simply a must-read for property tax professionals.

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