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 below a selection of articles from IPTI Xtracts; more articles can be found on its website (www.ipti.org).
New York: NYC Property Values in Limbo Amid Market Changes?
The COVID-19 pandemic has thrown New York City property valuations into a complete vortex where nothing makes sense and nothing is known. Is that an exaggeration? Perhaps. But it is the most critical question coming from the real estate world concerning prized assets. And it has no doubt stirred up plenty of anxiety.
Questions about “unknowns” and “uncertainty” are, however, somewhat overblown. There has been data out there that has attempted to quantify just how much value COVID-19 sucked out of the real estate market. Of course, what we know is not pretty.
Clouds hover over office properties in New York City due to COVID, with values dropping by $28.6 billion, or 16.6 percent from the previous fiscal year, according to an October report released by New York State Comptroller Thomas DiNapoli. The analysis also shows that values to the city’s office market are not expected to rebound to pre-pandemic levels until 2025.
And, yes, unknowns still abound. To wit, Jonathan Miller, president of real estate appraisal and consulting firm Miller Samuel, said the true impact of office valuations in New York and beyond may not be felt for years, given that many properties are currently protected by long-term leases. He said uncertainty with remote working trends and the potential for some companies to either downsize or relocate to newer office assets make it challenging to truly judge the value of existing properties.
“We’re not going to know for sure for several years, if not longer, but I certainly can’t imagine how a reversion to the pre-pandemic level becomes the norm,” Miller said. “The footprint that companies used to require is being recalculated and in most cases that’ll be much smaller.” New York City alone accounts for 11 percent of all office space in the U.S. at 463 million square feet as of the second quarter this year, according to the DiNapoli report. Prior to the pandemic, office properties had momentum on their side with the office sector reaching a historic high of 1.6 million jobs in 2019.
Office landlords have spent decades in the driver’s seat, Miller said, and it will take a while to adjust to a changing market reality. He said repurposing empty office space in Class B assets into other uses like residential or hotels will be hard to implement because of the obvious hurdles caused by zoning laws, layouts and building codes.
William Shanahan, chairman of New York City capital markets at brokerage CBRE, is more optimistic about the office sector and thinks there is a lag in the data included in the comptroller’s report. Shanahan noted that CBRE’s data shows valuations already bouncing back to pre-pandemic levels in Class A buildings. He said cheaper financing costs are part of what is driving a quick recovery for the sector in Manhattan.
“The sales we’ve seen this year in the market — they are easily pre-COVID [valuations] if not better than pre-COVID,” Shanahan said. “If you’ve got a good property and you’re getting leasing done, the investors see it and the prices go up.”
An October report from brokerage Newmark titled, “New York City’s Path to Recovery,” shows that 3.4 million square feet of sublease space has been withdrawn since October 2020, including 298,692 square feet in the first few weeks of this October, indicating a positive trend for the near-term future of the Big Apple’s office market. The largest sublease withdrawals included 240,384 square feet from accounting firm PwC at 90 Park Avenue, 190,932 by insurance firm CV Starr at 399 Park Avenue and 125,254 from educational publisher McGraw Hill at 1325 Avenue of the Americas.
Dustin Stolly, vice chairman and co-head of Newmark’s New York debt and structured finance team, said there are not enough data points yet to determine the future of office property values, but recent sales activity from the brokerage’s third quarter New York City capital markets overview indicates positive signals for the market. He said recent mobility statistics reveal reason for optimism with subway and bus ridership up 202 percent from the low point of the pandemic.
“Apartment rentals are now at or above pre-pandemic levels and apartment sales are breaking records,” Stolly said. “I’m a big believer in New York.” While Class A office properties are on the upswing, Class B buildings will suffer valuation declines because of their lower-credit tenants, resulting in higher vacancy rates and less space to accommodate health-related improvements to combat the pandemic, according to Shanahan.
The broker added that the only sectors in which he sees valuations struggling are retail and hospitality. He is more bullish on lodging bouncing back once international travel restrictions are eased and businesses resume in-person conference travel. Plus, headwinds were already buffeting retail prior to the pandemic with e-commerce reigning supreme and brick-and-mortar tenants being priced out of stores due to high rents.
“There were some brick-and-mortar issues that existed pre-COVID that were exacerbated by the pandemic,” Shanahan said. “Retailers have been successfully moving more business online so there’s less demand.”
Retail had the biggest property valuation dip from pre-pandemic at minus 37.19 percent as of June followed by office at minus 36.03 percent, according to data from research company Trepp. Lodging was the third most distressed asset class in that time frame with a 27.94 percent reduction, per Trepp.
While hospitality has struggled during the pandemic, Miller does not see the same long-term structural pressures for the sector as office given that travel is expected to pick up steam as those restrictions ease. A recent state comptroller’s report showed a nearly 17 percent fiscal year decline in the value of New York City’s office buildings.
The multifamily market has bounced back vigorously to healthy numbers after short-lived fears for the sector at the pandemic’s start. Year-over-year apartment lease signings in Manhattan rose 4.4 percent over the 12 months ending in September, according to Douglas Elliman data, prepared by Miller Samuel.
Ran Eliasaf, managing partner of real estate private equity firm Northwind Group, noted that at the height of the pandemic, when many people fled New York City, there was concern that there would be seven years of condominium inventory, but the market has recovered at a far quicker pace. Inventory is now likely closer to two to three years. Eliasaf said the demand spurring a boost in multifamily and condo property values is being driven by the tech sector, which he expects to overtake financial services as New York City’s main economic driver.
“Tech is really going to define the city,” Eliasaf said. “There is a very skilled workforce here and companies are finding it more affordable than Silicon Valley.” Miller said a big wild card that will go a long way toward how valuations play out is increasing property expenses that global supply chain constraints could compound.
“One of the concerns is that there’s somewhat of an expectation that rents will continue to rise, but at the same time expenses are expected to rise with supply chain problems,” Miller said. “Perhaps you’ll see a modest increase in rents continue, but you’re also seeing a modest increase in expenses because of the supply chain impact.”
Beyond the performance of individual property sectors looms the unknown of what capitalization rates might do. Their performance — whatever that turns out to be — could have profound effects on valuations.
Higher cap rates now are causing real estate and commercial mortgage-backed securities investors to ponder implications for property valuations, according to a report from Barclays bank released Oct. 22. The analysis noted, however, that with cap rates for office, multifamily and industrial lower than pre-COVID levels, a large increase would likely not have a broad effect on property valuations.
Lea Overby, Barclays’ head of CMBS research, said any increase in cap rates would also likely be muted by U.S. Treasury rates staying in the low-2 percent range. She stressed, though, that once Treasurys do rise that will have a more noticeable effect on cap rates and thus trickle down to valuations. “We don’t see a noticeable impact on cap rates in 2022,” Overby said. “At some point, Treasurys will start pushing up on cap rates.” Overby noted that, since 2000, cap rates have had less of an impact on property valuations because of more research tools available online that factor in variables like building ages, location and tenant quality.
Oregon: Google wins more tax breaks for two new data centers in The Dalles
The city council of The Dalles voted unanimously Monday night to grant new property tax breaks for two more Google data centers, worth tens or hundreds of millions of dollars to the tech giant. Wasco County commissioners voted unanimously in favor of the tax breaks last week.
Before Google proceeds with new construction in its property along the Columbia River, the company also wants agreement from the city on a deal to substantially increase the water available to the company to cool its massive data centers. The water pact, which has generated skepticism among some residents of the small city, is due for a vote early next month.
Google says it has spent $1.8 billion on its data centers in The Dalles over the past 15 years. The company said Monday that it expects to say more about its plans in early November. The new tax agreement is a vastly better deal financially for the local governments than three prior deals for Google data centers built over the past 15 years.
Google would pay $3 million up front for each new data centers. It would then pay half of the normal property taxes for the first new data center and 60% of regular property taxes for the second. While Google employs just about 200 in The Dalles, two new data centers combined could provide more than $6 million annually to the city, county and local government agencies. That’s according to county estimates, based on $600 million in spending on each new data center.
Potentially, that represents a 15% increase in what Wasco County collects in total property tax revenue each year, and it’s more than double what Google paid under three prior agreements.
Google’s new tax deal
- Duration: 15-year tax exemption for each new data center
- Savings: Half off the property taxes associated with the first new data center, and 40% off a second. However, Google would also pay $3 million, up-front, when it begins construction of each new project. On a $600 million data center, The Dalles expects Google would by $3.3 million annually.
- By comparison: Google’s first three deals had up-front payments of $280,000, $1.2 million and $1.7 million, respectively. It also paid $800,000 annually afterward in the first two deals, and at least $1 million annually in the third deal.
- Additionally: Google would transfer 35 acres of property to Wasco County and give The Dalles and the county an option to buy the new data centers’ land from the company if it ceases operations.
- Still coming: A separate deal, scheduled for a vote next month, would commit Google to pay $28.5 million to expand The Dalles’ water supply to meet the company’s future water needs.
City council member Dan Richardson acknowledged Monday that some members of the community oppose tax breaks for big companies like Google. He said he’s troubled by that idea, too, but feels The Dalles has to accept it.
“That’s sort of the reality of the world we live in, that cities and states have to compete, will compete, for big projects, and we either negotiate to try and find some beneficial agreement or get nothing,” Richardson said. “Google can go many places. It doesn’t have to build here or build more here.”
Oregon has some of the nation’s most lucrative tax breaks for data centers and puts no limit on how much local governments can offer. On the one hand, that gives small Oregon cities and counties the autonomy to make their own decisions. But it also forces them to compete with one another to offer the biggest tax breaks.
The state’s program of industrial tax exemptions, which dates to the 1980s, was conceived to draw large manufacturers and other major employers, long before the data center industry emerged. In the 21st Century, it’s proven to be an enormous windfall for wealthy Silicon Valley companies, which receive Oregon tax breaks worth more than $120 million annually.
Left unaddressed in The Dalles’ new tax deal is how much Google will pay in property taxes on its first corporate data center, which opened in 2006. It comes onto the tax rolls next year when its original tax breaks expire after 15 years. If Google continues to operate the aging facility, it could provide several million dollars more each year in new property taxes for the small community.
But Google won’t say whether it will continue running the original facility once it becomes taxable, or if it will make other changes – like moving the most expensive equipment into newer, more advanced data centers still covered by tax deals. Data centers are still a relatively young industry; Google’s original data center in The Dalles was its first such facility anywhere. So it’s not clear how long the company will continue using it, or in what way.
Google and the Oregon Department of Revenue are currently negotiating over how to assess that original data center. It’s an important precedent for Oregon’s multibillion-dollar data center industry.
Facebook, Apple and Amazon have collectively spent billions of dollars on server farms in small towns from Prineville to Hermiston, drawn by some of the nation’s largest tax breaks. All those facilities could eventually generate huge tax revenue for those communities – or very little, if the companies shut them down when they become taxable.
The Dalles and Wasco County didn’t seek any assurances from Google on its future operations or on the taxing methodology on the original data center in conjunction with the new tax deal. City Councilor Darcy Long-Curtiss said the onus is on Google to do the right thing.
“We’ll see how good of a partner Google is,” she said before Monday night’s vote. “Do you they try to get out of it, or do they just say, ‘Yep, that’s it,’ (pay their taxes) and not try to play shenanigans?”
Pennsylvania: Tower Health fights for its tax-exempt status, and local governments are watching
Non-profit hospitals and municipalities and school districts across Pennsylvania are closely watching the tax assessment cases involving Tower Health. The Chester County cases involving Phoenixville, Brandywine and Jennersville hospitals and another tax assessment dispute involving Pottstown Hospital are on appeal.
In October, a Chester County judge rejected Tower’s bid for property tax exemptions for three of its Chester County hospitals. Noting the money the hospitals transferred to Tower, Judge Jeffrey Sommer ruled the hospitals are more aligned with for-profit companies.
Also in October, a Montgomery County judge ruled the opposite from the Chester County judge — that Pottstown Hospital can continue to be exempt from property taxes, rejecting the Pottstown School District’s challenge to the status. The district had argued that pay incentives for executives and a push for higher compensation for former CEO Clint Matthews at Tower was more in-line with for-profit companies.
Tower has praised the Montgomery County ruling and criticized the Chester County decision. Attorneys William D. Kennedy and Jared R. Johnson of Berwyn-based White and Williams LLP called the Chester County ruling “a shot across the bow” of non-profit hospitals throughout the state.
“A recent trial court decision could have significant, long-term consequences for the financial models of Pennsylvania non-profit health care providers,” wrote Kennedy and Johnson. “Ruling that three non-profit Chester County hospitals of the Reading, Pa.-based non-profit Tower Health system are not tax exempt ‘charities,’ a judge has ordered them to begin paying millions in annual local property taxes which fund local school districts.”
The Tower Health decision has led local municipalities and school districts across the state to consider tendering property tax notices to non-profit health care entities that long have been deemed exempt from such expenses, Kennedy and Johnson said.
Representatives of the Pennsylvania School Board Association and the Hospital Association of Pennsylvania agreed the decision has their attention. “The (charitable) exemption has really gotten out of hand,” said Stuart Knade, chief legal officer of the PSBA. “If you want to cut your property taxes in half, put the other half of properties on the tax rolls.”
As it has in similar cases, PSBA will likely file a friend of the court brief as the case is appealed. The Hospital Association of Pennsylvania is also following the case closely. “We aren’t able to comment on the specifics of this case as we haven’t been directly involved at this point.” said Liam Migdail, director of media relations at HAP. “But we have been closely following this issue in general and can offer some context.”
Migdail said the association has seen an uptick over the past few years in municipal governments and school districts challenging the tax-exempt status of hospitals as they face funding challenges and look to bring in additional revenue.
“HAP has been following several of these cases,” Migdail said in an email. “Up until now, they have mostly been decided in favor of the hospitals. We will continue to follow this case as it is appealed.”
Officials from West Reading, where Tower’s flagship Reading Hospital is located, are also interested.
“We are closely following the tax assessment litigation involving Tower Health Hospitals,” said Jack R. Gombach, West Reading borough council president. “Throughout COVID-19 Tower Health was an excellent partner that took extraordinary measure to assist the borough to ensure the well-being of its employees and residents. I am confident that regardless of the outcome of the pending litigation, the new Tower Health leadership will treat the borough of West Reading and its residents fairly.”
A representative of Wyomissing School District could not be reached for comment.
According to a 2018 Reading Eagle article, Tower Health makes an annual payment in lieu of taxes of about $610,000 per year to West Reading and contributes $408,500 in financial support and professional services to the school district. It is unclear how long those agreements are in effect. A 2018 estimate put Berks County’s lost revenue from Tower at about $11 million.
It’s a lot of money for communities and hospitals.
For example, Pottstown Hospital’s removal from the tax rolls costs the Pottstown School District roughly $924,000 a year in property tax revenue. The hospital’s continued absence from the property tax rolls also costs the borough more than $200,000 per year in property tax revenues.
Pottstown Hospital’s removal from the tax rolls costs the Pottstown School District roughly $924,000 a year in property tax revenue.
Since 2018, the district has spent more than $200,000 on legal fees mounting the unsuccessful challenge, the Pottstown Mercury reported.
Meanwhile, attorneys Kennedy and Johnson noted that the Chester County decision could impact non-profit health care organizations such as skilled nursing facilities, retirement communities and home health care enterprises.
Migdail said preserving tax-exempt status is something “that’s been incredibly important to hospitals across Pennsylvania and nationally for a long time.” Two-thirds of Pennsylvania hospitals are organized as non-profits.
Migdail said Pennsylvania hospitals provided $809 million in unreimbursed care during fiscal year 2020. Many hospitals also absorb the significant cost of underpayments from Medicare and Medicaid, which is increasing due to demographic shifts, he said.
He argued that hospitals serve as economic flagships in their communities, directly and indirectly generating more than $155 billion a year in economic activity (about 20% of the state’s total gross domestic product) and supporting 615,000 jobs (one in nine statewide).
Knade argued that allowing property tax exemptions for non-profit hospitals has the effect of creating an obligation to support charities people did not choose and goes far beyond what was originally conceived for entities that gave uncompensated services to needy people.
He noted that payments or services in lieu of taxes are typically how cases are settled. The problem with such agreements is that they are usually for a limited period, and then the entity remains exempt.
White and Johnson said the Chester County judge implored the Legislature “for a long-overdue modernization of the tax-status statutes to fit the current world of health care reimbursements.”
Kennedy and Johnston said hospitals have long organized as non-profit corporations and received recognition as tax-exempt organizations by the IRS. More than two decades after for-profit hospitals entered the market, there are still twice as many non-profit hospitals as there are for-profits in the U.S.
They warned non-profits to pay close attention to the Chester County decision and review how and why revenue from a licensed health care enterprise is transferred to a parent company as well as the overall amount of executive compensation and billing and accounting practices with respect to genuinely uncompensated — as opposed to undercompensated — care.
Tower has appealed the Chester County ruling based on what it contends are factual and procedural errors and a flawed legal analysis. It has praised the Montgomery County ruling, which the Pottstown School District has appealed.
“We are particularly pleased the court acknowledged the more than $47 million in capital investments Tower Health has made at (Pottstown) Hospital since its acquisition, and the more than $43 million in uncompensated care we provided in fiscal year 2020 alone,” Tower said in a statement. “Tower Health continues to invest in Pottstown Hospital and its service to the community.”
Tower’s recent financial statements don’t discuss the possibility of paying taxes. Tower recently wrote off $370 million in value of its hospitals. Not including the write-off, Tower posted a $243.5 million loss for fiscal 2021, which ended June 30. It’s regarded as an improvement over fiscal 2020, when it lost $415.3 million. Tower announced in September it would close Jennersville and sell Chestnut Hill and about 20 urgent cares to Trinity Health Mid-Atlantic.
Illinois: Chicago’s trophy landlords infuriated as Kaegi boosts property assessments
Tax hikes are on the horizon for landlords of some of Chicago’s most prominent downtown buildings after Cook County Assessor Fritz Kaegi boosted their value. Kaegi valued Willis Tower, the city’s tallest building, at $1.25 billion, 78 percent higher than last year, Crain’s reported. His assessment of Aon Center more than doubled to $886 million and jumped 30 percent to $95.4 million for apartments at Aqua Tower.
The move is part of Kaegi’s campaign pledge to revamp property tax assessments. Since taking office three years ago, Kaegi made sweeping changes that agitated commercial property owners. This year, he moved to assessing properties in downtown Chicago from the suburbs, infuriating landlords.
“It makes no sense,” Farzin Parang, executive director of the Building Owners and Managers Association of Chicago, told Crain’s. “It’s very political to us. He’s constantly pitting business versus residents.” Critics say that Kaegi is raising assessments even though the pandemic has prevented people from returning to offices. The business district vacancy rate rose to 17.9 percent in the third quarter from 17.3 percent in the prior three months.
Kaegi previously told The Real Deal that “assessments are out of date and there are huge inequities.” He said, “I don’t know the alternative that is being proposed instead of market value.” Kaegi’s office says the focus is on accuracy. His predecessor, Joseph Berrios, is under investigation by a federal grand jury probing property value estimations his office made on a number of central business districts and high-end neighborhoods.
“The days of favoritism in the assessor’s office are over,” Scott Smith, a spokesman for the assessor, told Crain’s. While downtown landlords will file appeals, it may be an uphill battle.
Willis Tower, for example, was assessed by Berrios at $697 million in 2018, even though Blackstone paid $1.3 billion for it in 2015 and invested an additional $500 million two years later. That suggests Kaegi’s assessment may not be that far off the mark.
Ares Management bought the 82-story Aqua Tower for $191 million in 2019, when it was assessed at $254 million, well below its most recent valuation of $95.4 million. Aon Center, however, was valued at $824 million when it was refinanced three years ago by a venture led by 601W, well below Kaegi’s assessment.
If landlords aren’t satisfied after filing appeals to the assessor’s office, they can turn to the county Board of Review or the Illinois Property Tax Appeal Board. Kaegi doesn’t have a final say on the value of the properties.
United Kingdom: 10 things to know from Rishi Sunak’s business rates review findings
In the recent Budget, the chancellor, Rishi Sunak, announced a range of changes to business rates, including more-frequent revaluations, and a 50% temporary discount on rates, to a maximum of £110,000. From 2023, every business will be able to make property improvements and, for 12 months, pay no extra rates.
He also announced the publication of the final report of the business rates consultation, which closed last month. Drapers details key points from the consultation’s conclusion and business rates announcements that did not make it into the chancellor Budget speech.
- Additional funding: The Treasury has allocated £500m to the Valuation Office Agency (the government agency that values properties for council tax and business rates in England and Wales) to help the agency upgrade its IT infrastructure and digital capabilities.
It has also allocated £31m to support the digitalisation of the business rates system. This sum is subject to a review that is set to launch later this year.
- The multiplier: In addition to cancelling next year’s planned multiplier increase, the government also hinted at changes to existing multiplier legislation.
It said: “the review highlighted the case for several amendments to the existing legislation around the business rates multiplier that could provide greater certainty and flexibility on rate setting in the future”.
Proposed changes could include making the Consumer Price Index the default measure of inflation for uprating [instead of an amount set by central government which it reviews in line with inflation], and clarifying which businesses are eligible for the small business multiplier.
Business rates are currently calculated by multiplying a property’s rateable value (RV) by the relevant multiplier (or uniform business rate, UBR) and applying any relevant reliefs. The small business rates multiplier is currently 49.9p for every £1 of rateable value, and applies to properties with RVs below £51,000. The standard multiplier for properties with an RV above £51,000 is 51.2p.
- Misuse of rates: The government detailed that the consultation responses it received highlighted concerns with regard to misuse of Empty Property Relief, which provides a 100% rates discount for empty properties for the first three months it is empty. As a result, the government has said that it will undertake “further detailed work” on this and consult on proposals in 2022.
- ‘Antecedent’ valuation date: The consultation highlighted that respondents were concerned that the gap between the AVD (Antecedent Valuation Date – the date on which rates valuations are based) and the compilation date (the date the new rate comes into force) was too long.
While the government said there is a case to adapt this, it is not set to happen until after the three-year revaluations are put in place, to ensure the move to more frequent revaluations is not delayed.
- Ratepayer requirements: Subject to a consultation, ratepayers will be required to notify the VOA of any changes to the occupier or to physical property characteristics in addition to rent, lease and trade information.
The department said the changes “will help increase the quantity and quality of information provided to the VOA, ensuring more accurate valuations and, in turn, reducing the need for ratepayers to submit Challenges against their valuations”. If approved, it is set to be implemented from 2023 onwards.
- Penalties: To complement the proposed ratepayer requirements, a compliance regime will be rolled out. This will include penalties for non-compliance, which includes the provision of false information, as well as the failure to comply, which could include making the required payments and providing correct and accurate information.
- Speeding up the appeals process: Currently, the rates appeals process is a three-stage process called “Check, Challenge, Appeal”. Once the ratepayer has submitted information the VOA has a maximum of 12 months to consider the information supplied and to decide as to whether they accept the alterations being proposed by the ratepayer.
To speed up the process, the Check stage, which involves submitting “factual details” of the property, such as floor plans, property photographs and rent agreements, will be removed from 2026.
- The challenge window: To ensure that challenges can be cleared within each three-year cycle, a challenge window of three months will be introduced from 2026. New list entries (that is, newly built properties) who apply after the closure of the window, and new occupants of an existing property, will still be able to make a challenge, subject to consultation.
- Transparency: From 2023, new guidance will be published. It will provide more detail on rating principles and the class-specific valuation approach (which payment category each property falls into).
From 2026, based on the AVD from 2024, the government will publish more information about how a rateable value has been set for a specific property, which will include an explanation of how the evidence has been used to arrive at the rateable value. This would be accessible on request to the VOA.
- Transitional relief: The government plans to introduce a consultation on transitional relief (which tapers the cost of business rates following the implementation of each revaluation) in 2022.
Any changes will apply after the 2023 revaluation. It confirmed that next transitional relief scheme will be confirmed in autumn 2022.
United Kingdom: Government can’t duck more drastic business rates reform
The outcome of the latest review tinkered with the existing system but left key issues unaddressed
The subject of business rates induces a particular form of madness. Instead of doing the same thing and expecting a different result, everyone asks the same questions and hopes for different answers.
And so, nearly seven years after the then-coalition government promised a “radical” overhaul of the business property tax in England (something adopted by the Conservatives in their manifesto), there’s been little progress — despite what feels like countless consultations, reviews and inquiries in the meantime.
The latest, a much-delayed effort released at last month’s budget, respected the time-honoured traditions in this area: it made some sensible tweaks to the English system, unveiled existing policy as if it were new and punted some big questions into further consultation.
Business, which generally welcomed changes to encourage investment in buildings and green technology, remains stuck with a system that everyone broadly agrees is outdated, was designed in a pre-digital age, and produces a tax burden three times higher than the OECD average.
Short-term relief, such as freezing the tax rate or multiplier for another year until the next revaluation of properties in 2023, was helpful. But a cap of £110,000 per business on a rates discount for retail and hospitality, for the year to April 2023, means that larger, multi-site operators will barely benefit, in a market where over a third of properties don’t pay rates at all thanks to relief for small businesses.
The result is that many businesses will, from April next year, bear the full burden of rates again based on values that date back to 2015 — a pre-Brexit, pre-pandemic era that in online shopping or consumer behaviour terms may as well be the Mesozoic.
One problem is that this whole debate has, in recent years, become dominated by the idea that business rate cuts could Save the High Street by levelling the retail playing field between shops and online operators.
Tax changes could never really insulate bricks and mortar from the impact of digital, something the pandemic acceleration in that shift rather demonstrated. Economists also balk at the idea given that, in theory over the long run, lower rates should be reflected in higher rents, meaning a cut wouldn’t ultimately help the occupier.
But the burden of business rates is an issue in the post-Covid recovery and regeneration. And the Treasury is, not unreasonably, determined to defend a tax that generates £25bn a year.
The economist purist alternative of a land value tax is viewed somewhat suspiciously on those grounds, and those wary of who the winners and losers would be. The prospect of a controversial online sales tax, the proceeds of which the Treasury says would be used to reduce the business rates burden, is out for another consultation.
Businesses are focused on the chances of meaningful relief come the next revaluation in 2023: namely yet another consultation on whether sharp falls in values — with some locations down by half since 2015 according to property group Colliers — will be passed on in rates immediately, or gradually as has happened in the past.
The likelihood of a fall in rateable values, which is typically balanced by a higher tax rate to maintain the Treasury’s take, presents a challenge for everyone: businesses expecting a sizeable cut who may be disappointed and government contemplating hiking a rate that has already gone from 35 per cent in 1990 to about 50 per cent. The Treasury says only that it will consider this next year.
What there is broader agreement on is that a more flexible, responsive system that reflects fortunes on the ground more quickly is needed. The promised shift from a five-yearly to three-yearly revaluation cycle helps, but has been policy since 2017.
The overall process remains too long, with each cycle reliant on valuations taken two years earlier. Reducing that further merits further consideration. As do continuing calls for annual revaluations and linking rates to measures of local property values rather than inflation, or indeed to underlying business performance.
Ultimately, the government has just wrapped up its fundamental reassessment of how to reform business rates in England. Expect to be discussing the same questions for many years to come.
United Kingdom: More than 400k firms stuck in business rates appeals system
More than 400,000 businesses are stuck in the business rates appeals system, with bosses frustrated at the lack of progress. Since April 1 2020, some 446,620 checks – the first stage of the appeals process in the check, challenge, appeal journey – were registered by bosses against their business rates bills.
Nearly three quarters of the total 605,530 appeals registered since the 2017 Rating List began – four and a half years ago – were registered in the last 18 months. These figures highlight the devastation and disruption endured by businesses during the pandemic, according to real estate firm Colliers.
After businesses rushed to appeal for reduced bills under existing “material change of circumstance” (MCC) rules, the government ruled this out for bosses. It said it would introduce a £1.5bn relief fund to help impacted firms. However, the related legislation has still not passed through Parliament to become law and none of the fund has been dished out to firms. The ratings industry and businesses have been left “very much in the dark” over how to apply to receive the relief fund.
“The Government ripped up the rule book retrospectively and those hundreds of thousands of businesses who had gone to the trouble of registering through the tortuous CCA appeals system in good faith, have found the goal posts moved before their very eyes,” Colliers added.
The latest figures also show the slow pace through the appeals system. Out of 112,260 Challenges – the second stage in the process – to the list to date, there are still 63,780 outstanding, more than four years since the ratings list.
- Paul Sanderson, President | psanderson[at]ipti.org
- Jerry Grad, Chief Executive Officer | jgrad[at]ipti.org
- Carlos Resendes, Director | cresendes[at]ipti.org
Compliments of the International Property Tax Institute – a member of the EACCNY.