Member News

IPTI | Update on Property Tax Issues: October 2020

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes in the USA and Europe. IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).

USA

New York: NYC’s Revenue Loss Less Than Feared as Property Taxes Gain

New York City’s tax revenue from March through August fell by $1.2 billion, or 3.5%, from a year earlier, a smaller decline than expected, as property tax growth helped offset a sharp decline in sales- tax receipts because of the coronavirus pandemic.

Property taxes, the city’s largest single revenue source, rose 3.9% to $16.3 billion, according to a weekly economic and fiscal outlook from city Comptroller Scott Stringer. Sales taxes plummeted 23.2%, or $918 million, after the coronavirus shuttered thousands of shops, restaurants and dimmed the lights on Broadway. Personal income tax, the city’s second biggest revenue generator, fell by almost $500 million, or 7.2%.

“Given the lagged nature of changes in assessments, the impact of the pandemic on property taxes will likely only occur in future years,” the report said. “Overall, however, the loss in revenue has been more contained than initially expected.”

Property taxes have traditionally been a stable and predictable source of revenue for local governments, tempering the volatility of sales and income taxes that are more sensitive to the economy. During the Great Recession, which was precipitated by the housing market crash, U.S. property tax collections declined in only one year, 2011, and by just 1.4%, or $6.8 billion, according to Census Bureau data. New York City property tax collections didn’t fall during the Great Recession, according to city’s financial reports.

New York City, the epicenter of the pandemic’s first wave, had its credit rating lowered one level by Moody’s Investors Service on Oct. 1. The downgrade reflected the severity of the pandemic’s impact on the economy of the most-populous U.S. city and the expectation it will take longer to recover than most other major cities, the rating company said. Still, tax collections exceeded estimates by both the city’s Office of Management and Budget and the comptroller’s office by about $1 billion, for the fiscal year ending June 30, the comptroller said.

Although millions of Americans are unemployed and homeowners and small business can’t pay their mortgages, Fitch Ratings doesn’t expect property collections this fiscal year to be “meaningfully affected,” by mortgage forbearance programs and delinquencies, the rating company said Sept. 29. Servicers for mortgages pooled into bonds must advance property taxes to local governments when borrowers don’t pay, Fitch said. The share of residential mortgages in forbearance was 6.32% as of Oct. 12, according to the Mortgage Bankers Association.

“It’s in their interest to keep paying because they have a lien on the property,” said Amy Laskey, a Fitch analyst. “If the property has any value it will eventually get sold and someone will eventually pay the taxes. It just may be delayed.”

Without more federal aid, mortgage delinquencies may increase, placing greater pressure on mortgage servicers, Fitch said. Delinquencies on property-tax bills for the first two months of New York City’s fiscal year, totaled $646 million, a $122 million increase, from the same period last year.

Real estate transaction taxes and hotel occupancy taxes had the largest percentage declines, 41.5% and 52.9%, respectively. Unsold listings of Manhattan homes have surged to more than 9,300, a level not seen since the global financial crisis. Travel restrictions have crushed New York’s tourism industry.

One bright spot: Wall Street. The Standard & Poor’s 500 Index is up  almost 9% this year and investment-bank revenue jumped 32%, hitting an eight-year high in the first half of 2020, as companies raced to raise cash in the bond market and trading soared, according to research firm Coalition.

“The strong performance of the stock markets and Wall Street firms has so far defied most expectations at the onset of the pandemic and the experience of prior recessions,” the comptroller’s report said.

Pennsylvania: Allegheny County, others prepare for a surge in assessment appeals by COVID- ravaged businesses

Allegheny County is bracing for what could be a budget-wrecking spike in property assessment appeals by hotels, shopping centers  and  other commercial property owners ravaged by COVID-19 — a situation that could cost towns and school districts already hit hard by the pandemic even more tax revenue.

David Montgomery, solicitor for the county’s board of property assessment appeals and review, is expecting a “big volume” of cases from hotels and others looking for relief because of the pandemic. “I’m a little nervous about what we’re going to see,” he said.

Signs of the surge in appeals are already being seen in neighboring counties who have earlier deadlines, and some government officials in the region are bracing for the potential cascading effect— perhaps even a renewed need for countywide property assessments once things start to return to some version of normal. “It’s the perfect storm,” said Janet Burkardt, special tax counsel to the Pittsburgh Public Schools.

In Allegheny County, property owners have until March 31 to file appeals for 2021. Nonetheless, real estate attorneys already are talking to potential clients. Jonathan Kamin, co-managing partner of the Goldberg Kamin & Garvin law firm, said he has consulted with more than two dozen commercial property owners about appealing — mainly over shopping centers and hotels.

Given the way COVID has hammered both, he said, it’s not hard to make a case for an assessment reduction that would lower their municipal, county, and school district tax bills. He noted that shopping centers either have lost tenants because of COVID or have been forced to slash rents. Some hotels have been closed since mid-March. Others only recently reopened. “These properties aren’t worth what they were prior to COVID because the economic realities have changed,” he said.

Likewise, Jason Yarbrough, a partner in the Meyer, Unkovic & Scott law firm, is expecting a “fairly significant” number of appeals involving commercial property owners, though he declined to say how many he is handling.

Clients could include owners of shopping centers, hotels, retail, and office buildings. “A lot of them have seen increased vacancies, a lack of income coming from tenants, and more difficult prospects in renting space,” he said. “People are hesitant to commit to long-term tenancies given the uncertainties. It’s very challenging for the landlord to find someone who is going to commit to space long term in this environment.”

Butler County, whose deadline for 2021 appeals was Aug. 1, already has witnessed a sharp spike in cases involving commercial property owners — from 40 in 2020 to 60 for next year, excluding churches. “COVID has been brought up in each and every one of them,” said Amy Francis, the county’s chief assessor.

So far, the issue doesn’t seem to be hitting hard in Westmoreland County. The 2021 deadline also was Aug. 1 and there was a small increase in commercial appeals, from 97 in 2020 to 101 for next year. But Beth Stabile, deputy chief assessor, pointed out that there were 104 commercial appeals in 2019.

“It’s been pretty consistent across the board,” she said. “There has been no increase due to COVID, at least not here.”

In Allegheny County, the assessment board is looking to engage more commercial and residential hearing officers to handle the expected rush, Mr. Montgomery said. Rivers Casino, believed to be the county’s highest assessed property at $245.9 million, already has appealed its 2020 assessment. It filed just before the deadline last March after it was forced to shut down because of the pandemic and stay-at-home orders.

“Rivers Casino Pittsburgh filed in March to preserve the option to appeal its 2020 assessment,” spokesman Jack Horner said. “On March 15, Rivers Casino suspended operations to help slow the spread of COVID-19 and reopened on June 9. Rivers Casino shut down again July 3-10, to comply with a countywide order from the Allegheny County Health Department.”

The pandemic easily cost the North Shore casino millions of dollars in revenue and likely was the basis for the 2020 appeal and perhaps will be again in 2021 if another is filed.

Loss of income is one of the main arguments that commercial property owners are able to use in assessment cases. It probably will be a key driver in many of the 2021 appeals.

“If they have lost revenue, they can claim lost revenue and that’s a legitimate argument in an assessment appeal,” said Mike Suley, a former county assessment director and board member who now serves as a private consultant. He called it a “silver bullet” issue.

If Rivers Casino can show that its market value is 5% less than its $245.9 million assessment, it could see its tax bill reduced by $1 million, Mr. Suley estimated. That’s $1 million that won’t be going to the city, the county, and the Pittsburgh schools.

That’s the kind of statistic that keeps Ms. Burkardt, with the Pittsburgh Public Schools, awake at night. As she prepares for an onslaught of commercial appeals, Ms. Burkardt readily acknowledged that it will be difficult to argue against reductions, given how the coronavirus has devastated the retail and hospitality industries.

She also expects some of the big Downtown office towers to weigh in next year, as tenants reduce their footprints as people work from home.

“I have nightmares about it. I don’t like to spend a year losing cases,” she said. The strategy this year, she noted, “is that we will try to minimize the damage and then we’ll have to see when the recovery happens.”

Ms. Burkardt said counties, municipalities, and school districts already are facing losses in earned income and other forms of tax revenue because of the pandemic.

As part of a “double whammy,” many also are facing rising costs while trying to deal with the crisis. The school district, for example, has had to spend money to supply laptops and other devices to students so they could be taught from home, she said.

Assessment appeal reductions would further cut into the tax revenue those taxing bodies count on. And in Allegheny County, where taxes typically are paid upfront before appeals are decided, those bodies also may have to pay refunds to property owners.

Many of the commercial appeals end up before the county board of viewers, where they could take up to several years to resolve, potentially meaning multiple-year refunds.

Adding to the woes, Ms. Burkardt lamented, is that once reductions are put in place, they remain that way unless there is another appeal — or a countywide reassessment.

The school district, she added, doesn’t have the wherewithal to appeal the reductions once the pandemic wanes and hotels, shopping centers, and other commercial properties bounce back.

“We’re going to need a [countywide] reassessment in a huge way,” she stressed. “You might need litigation to compel it. That would be interesting.”

The last full reassessment in Allegheny County was in 2013.

Mr. Suley agreed that taxing bodies are in a tough spot, particularly given the impact the coronavirus has had on commercial properties. “If you lose income, your property is not what it was worth a year ago,” he said.

While COVID-generated appeals might be good for hotels, shopping centers, office owners and other commercial ventures, “it could be a hemorrhage” for local governments.

And that ultimately could trigger tax increases, Mr. Suley predicted.

The rule of thumb? “If somebody gets a tax break, somebody else pays more,” he said.

California: Forty-two years later, will voters recast Prop 13?

Every column about taxes could begin with the late Sen. Russell Long of Louisiana, a longtime chairman of the Committee on Finance. When it comes to taxation, Long said, Americans believe: “Don’t tax you, don’t tax me, tax that man behind the tree.”

Americans have never been shy about seeking out that man behind the tree when they wanted government to spend more. When possible, we like the benefit of government services without having to pay for them.

Ever wonder why it’s easy for elected officials to jack up the transient occupancy (aka hotel) tax? It’s because the people who pay live (and vote) somewhere else.

In November, state voters will be asked to reconcile their devotion to Proposition 13 with their affection for raising money at someone else’s expense. In the case of Proposition 15, someone else would be the owners of any business property worth more than $3 million.

Proposition 15 would create the so-called split roll, directing tax assessors to assess commercial and industrial properties differently from residential properties.

At a time when the state faces a budget deficit north of $54 billion, the change could raise an additional $12.5 billion a year for schools and local governments.

Since the passage of Proposition 13 in 1978, owners of commercial property have enjoyed the same benefits as homeowners. Under the tax-limiting measure, the valuation of any property cannot be increased by more than 2% a year until the property is sold.

Given the appreciation associated with the California real estate market, that means many properties are assessed at an amount far below their market value.

Which is why houses of similar value can be subject to dramatically different property tax bills. If you’ve owned a home for, say, 40 years, you may pay $2,500 a year in property taxes while the young couple who just purchased a similar house down the street may pay three time as much. In this case, the young couple become stand-ins for “the man behind the tree.” It’s difficult to identify the fairness in this. The tax burden becomes just one more obstacle for would-be homebuyers to overcome.

Despite the state’s liberal reputation, Californians have always held dear the protections guaranteed by Proposition 13, which is why decades of Democratic-controlled Legislatures have never dared mess with it.

In 2018, the 40th anniversary of the ballot measure, a survey showed 65% of likely voters believe Proposition 13 has been “mostly good” for California.

If Proposition 13 was less than perfect — and it was less than perfect — voters didn’t want to hear it. Fewer than 2 in 5 voters trusted the state government to enact reforms. (If that sounds bad, consider that the same poll found fewer than 1 in 5 Californians trust the federal government to do the right thing.)

Welcome to the American paradox. We know there is work to do, and we know we don’t trust government (or anyone else) to do it.

Now comes a measure backed by public employee unions to let commercial properties pay more. Proposition 15 would direct that commercial property worth more than $3 million be reassessed to full market value every three years. (Sponsors and opponents disagree about the extent of the exemption for agriculture.)

The measure responds to critics who have pointed out that residential properties are bought (and reassessed) more frequently than commercial properties.

Recently, Gov. Gavin Newsom announced his support of Proposition 15, a measure he described as “a fair, phased-in and long-overdue reform to state tax policy.”

Three days later, The Press Democrat Editorial Board recommended a no vote, warning of unintended consequences for small businesses. The editorial also said a tax increase won’t be in order “until unions, and public employers, get serious about real pension reform.”

After all these years, the timing of this measure turned out to be less than optimum. As the COVID-19 pandemic extends into its seventh month, we know that thousands of businesses won’t survive the current lockdown.

And so we return to a familiar topic: How will this pandemic change us?

In more ways than we can count, everything is turned upside-down, and at least for now, figuring out the impacts of these decisions will remain a fancy form of guesswork.

In endorsing Proposition 15, Newsom also said he would oppose a proposed higher income tax bracket for the wealthiest Californians, warning that the additional burden might cause employers and investors to leave. “In a global, mobile economy,” he said, “now is not the time.”

With so much uncertainty — and anxiety — associated with the pandemic, there is bound to be conflict. We’re still trying to figure out what will make things better and what will make things worse. On an uncharted landscape, there’s nothing easy about these calculations.

A new Public Policy Institute of California poll shows Proposition 15 is leading among likely voters, 51% to 40%.

In a perfect world, the governor and state Legislature would get on with the business of modernizing the state’s archaic and convoluted system of taxation, a system cobbled from a series of historical accidents.

Unfortunately, this isn’t a perfect world.

Illinois: Chicago property owners brace for hefty tax hikes

 Financially battered from years of being slapped with higher real estate taxes and municipal fees, Chicago property owners are shuddering about what tax increases are on the horizon for 2021.

Mayor Lori Lightfoot’s dark vision of the city’s 2021 budget deficit skyrocketing to $1.2 billion is frightening to the average homeowner who likely will have to dig deeper in 2021 to pay ever- increasing real estate tax bills.

Earlier in 2020 the COVID-19 virus spiked the budget shortfall to nearly $800 million, and the mayor said the deficit would be filled using relief funds, federal dollars, debt refinancing, and borrowing.

This bad news comes after homeowners scratched to pay the final installment of the largest property tax hike in Chicago’s history – $589 million phased in over the past four years to pay for pensions for the city’s police officers and firefighters.

Analysts say Mayor Lightfoot now is considering a plan to save $200 million in 2021 by reducing the city’s work force of 31,000 full-time and 1,800 part-time employees through furloughs and layoffs.

Since many city workers are members of municipal unions, the mayor is asking Chicago labor unions to suggest alternatives and measures to help protect workers. Other cost cutting could come from tapping surplus Tax Increment Financing (TIF) funds.

Chicago property owners will receive the first installment of the 2020 real estate tax bill due on March 1, 2021. Typically, the amount of the first installment is 55 percent of the last year’s total bill.

Hefty 2020 property tax bill increases could come due in August 2021, when the second installment of the bill arrives.

Along with paying for the skyrocketing city budget, much of the predicted property tax increase also could depend on the work of Cook County Assessor Fritz Kaegi who said he has dramatically revamped the assessment process, especially how commercial properties are valued.

Kaegi said he started from the ground up, reworking the assessment formula and drawing on Multiple Listing Service information about sales prices. For 2020, the assessor is re-assessing the south and western suburbs.

Crystal ball gazing into the outlook for the expected 2020 property tax hike, payable in 2021, is cloudy, tax experts say.

“The property tax bill is determined by four factors – the assessment, the equalization factor or multiplier, the tax rate, and the exemptions,” said Michael Griffin, a Chicago real estate tax appeal attorney.

Homeowners also should review their exemptions because they can reduce their tax bill if they have the proper exemptions applied to their tax bill, Griffin noted. The three main exemptions are the Homeowner Exemption, Senior Exemption, and Senior Freeze.

The Homeowner Exemption recently was increased to $10,000 from $7,000, and the Senior Exemption was hiked to $8,000 from $5,000. Those amounts are deducted from equalized assessed value of a home to which tax rates are applied to determine individual tax bills.

Also, more seniors can qualify for the Senior Freeze because the Illinois Legislature increased the maximum annual income to receive the freeze to less than $65,000 from less than $55,000.

“Every homeowner should review their last tax bill to see if they received the proper exemptions and contact the assessor if the exemptions are wrong,” Griffin advised.

Predicting a hefty property tax increase next year really centers on two wild cards – the tax rate and the state equalization factor, which can’t be challenged by taxpayers.

The equalization factor, or “multiplier,” is established each year for Cook County to bring property tax assessments in line with other parts of Illinois. The value is determined by the Illinois Department of Revenue.

However, the main engine that drives up property tax bills is the amount of money spent by local government.

Property owners who think they are over-assessed should file an appeal. The Cook County Assessor and Board of Review have expanded the online filing process so a homeowner can file their appeal without having to visit either office. Contact the assessor’s office to find comparable properties or start the appeal process.

If the deadline for filing an appeal for your township has already passed at the assessor’s office, you still can file an appeal with the Cook County Board of Review and the Illinois Property Tax Appeals Board.

EUROPE

Greece: Property rates set to increase

Property surveyors have submitted their recommendations for the adjustment of zone rates to the Finance Ministry, with the system for the calculation of the so-called objective values – property prices used for tax purposes – including an additional 3,000 areas.

The new values will start applying from January 1, 2021, provided developments on the coronavirus pandemic front allow it, otherwise it will be postponed till the second half of next year.

The competent committees of the Finance Ministry will process the surveyors’ recommendations and if they identify an area with two very different estimates by surveyors, a third will be invited to give their view.

Once the process is completed, the ministry’s political leadership will decide whether the new zone rates will be brought to the same level as the market prices or will be slightly below the going rates. In any case, the pledge of the ministry to the country’s creditors is for objective values to be on a par with the market rates.

Sources say that there are recommendations for a 10%-15% hike in the objective values of areas such as Agia Paraskevi in northern Athens and Karpenisi in central Greece. As for the caldera area of Santorini, the zone rate currently stands at 1,600 euros per square meter while the surveyors are recommending that the objective value there should rise to €3,000/sq.m. However, the actual market prices there range between €4,000 and €4,500/sq.m. In this case the objective value will not be equal to the market price but up to 50% below it.

The surveyors’ proposals point to hikes in the center of Athens, which benefited in recent years from the rapid rise of the short-term rental market, as well as to less privileged areas where the objective values have been kept at low levels on social grounds.

Besides the above areas, one should expect hikes in another 4,132 areas around the country where the previous government decided to keep the objective values at the same level during the latest adjustment so as not to lead to tax hikes.

Ireland: Local authorities say they will have to cut services over collapse in revenues

Local authorities will be forced to start cutting all services including housing maintenance, roads, lighting and parks services, community grants, festivals and arts supports without significant exchequer investment to cope with the impact of the Covid-19 pandemic.

Austerity measures are likely as city and county councils estimate they will need €300 million for next year and about €190 million in 2022 to maintain services because of the collapse in revenues, with losses this year expected to be €367 million. Local authorities’ spend directly on Covid-19 is expected to be €90 million by year end.

Commercial rates represent about 30 per cent of city and county council income, and the State’s six months’ rates waiver from March is expected to be paid to councils in the next few weeks.

But, according to one source, councils attempting to collect rates for the next six months are “having to walk in the door to businesses in tourism, hospitality, hotels and pubs to collect rates”. That sector pays some €320 million annually in rates.

“Very few of them have the capacity to pay” and “to collect €110 million to the end of the year will be some job”. Authorities will be lucky to collect even one third or half the outstanding €150 million to the end of the year and “in the first three months of the year the tourism sector was doing very little”.

The Government may offer another six months’ waiver to businesses in Budget 2021, but authorities are hoping the State will also pay 80 per cent of the estimated €367 million in losses as other revenue streams dried up, and share the burden with councils and “keep local services going”.

Business in shops in city and town centres has also collapsed, with a huge drop in footfall and about €80 million in lost parking income, despite some improvement during the summer months. Parking fee income in 2019 was €104 million.

Litter fines, planning fees, income from the awards of licences, property and house rentals and other services account for 27 per cent of income, with expected losses of €78 million.

The issue was raised in the Dáil recently when Minister of State for Local Government Peter Burke acknowledged that local authorities “have seen an absolute collapse in their goods and services income, that rates income and the ability to collect rates will be under significant pressure, and that the Government will do everything we can to support the local authority sector”.

Sinn Féin TD Martin Kenny said that 80 per cent of funding the Government gives to local authorities must be used for items that are already earmarked. He said both Sligo and Leitrim county councils had been unable to pay housing grants because there is no discretionary fund in place and the councils’ income streams had collapsed.

The Dáil also heard that Cork City Council had a budget deficit of €2.5 million, excluding the deficit in rates, while Kerry faces a shortfall of between €13 million and €14 million in next year’s budget. The estimated Covid-19 impact on Mayo in 2021 is €7.2 million.

United Kingdom: ‘Unprecedented’ number of UK businesses seek business rate cut

 Appeals against the local levy climb as impact of pandemic on high street looks set to continue.

An “unprecedented” number of companies are attempting to reduce their business rates bills as the impact of the coronavirus pandemic on high streets and offices looks set to last far longer than first anticipated.

According to Colliers International, the property consultancy, some 170,000 businesses have taken the first step towards appealing against their rates since the pandemic began in the UK in March. That is more than the total number in the three previous years, during which 159,000 queried their rates.

“The numbers are unprecedented,” said John Webber, head of business rates at Colliers. Coronavirus is the “biggest material change in circumstances in the history of rating”, he added.

Appeals are lodged with the Valuation Office Agency, part of HM Revenue & Customs. Businesses raise queries about their rates through a three-stage process called “Check Challenge Appeal”.

Typically, the VOA will assess these individually, but given the wave of “checks” that have been submitted, Mr Webber anticipated that more sweeping changes may be implemented.

“They might be tempted to look at it across whole regions: every shop, hotel and office in some locations have been affected. The numbers [the VOA] have got mean they’ve got no choice other than to deal with them in a much more broad-brush way,” he said.

A separate review of the rates system is under way, and business groups have called for rates to be frozen for the next two years and then reduced, to reflect the pandemic’s impact.

Business rates are a considerable cost for any company occupying commercial premises, and provide an important income stream for councils, which use the revenue to fund local services. In the last tax year, local authorities collected £25.6bn in business rates.

The payments are based on a building’s rateable value — effectively an estimate of a property’s rental value at a given date. Current rateable values are set according to rents on April 1, 2015.

Office occupiers, retailers and hoteliers complain that coronavirus has destroyed the previous basis for assessing rateable values. Non-essential retailers have faced extended closures and heavy reductions in footfall; hotels have seen guest numbers plummet; and offices have been largely empty for the last seven months.

Those businesses argue that the pandemic has meant a material change in circumstances, an argument the VOA will now weigh up.

The VOA said: “The coronavirus pandemic has led to an unprecedented increase in ratepayers seeking reductions in their rateable values.” The agency added that it had cleared a number of cases at the “check” stage and was now seeing a “higher than usual numbers of challenges”.

Some companies, such as small businesses in retail, hospitality and leisure, have been granted temporary relief from rates bills until April, by which point it had been hoped that normal operations would have resumed.

But many have missed out on rates relief or grants — which have only been offered to businesses in certain sectors or with premises below a certain rateable value — and a full recovery by next spring looks unlikely.

“We’re still expected to pay the full rate, which for us is £100,000. It’s ridiculous when you consider our business is down 94 per cent since March and doesn’t look like it will come back immediately,” said Jane Dancaster, who runs an English language school in Wimbledon.

“The overhang of Covid-19 will be a lot longer than people think. People thought it would be over by Christmas and that by next April they would be paying rates,” said Mr Webber.

Authors:

  • Paul SandersonPresident | psanderson[at]ipti.org
  • Jerry GradChief Executive Officer | jgrad[at]ipti.org
  • Carlos ResendesDirector | cresendes[at]ipti.org

Compliments of the International Property Tax Institute – a member of the EACCNY.