IPTI | Update on U.S. & EU Property Tax Issues: October 2022

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).

United States

New York: NYC office market faces ‘real estate apocalypse’

Dive Brief:

Office valuations in New York City are forecasted to decline by as much as 39% by 2029 due to remote work trends, according to a recent report from professors at the NYU Stern School of Business and Columbia University Business School.

That plunge represents a $453 billion valuation drop for New York City office buildings, while similar declines could occur in other U.S. cities, the report noted. What the authors call an “office real estate apocalypse” also will have negative implications for nearby businesses and local public finances.

The authors said that lower quality, less expensive office buildings will experience much more volatile swings in valuation, while higher quality office buildings are somewhat buffered against the downward trend.

Dive Insight:

The COVID-19 pandemic accelerated the push for remote work, which in turn, decreased office space demand. Physical occupancy, or the amount of people working in an office building on any given day, fell from 95% in February 2020 to about 47% last month in major U.S. office markets, according to the report.

In a worrisome sign for office markets, the study estimates the trend toward more remote work likely will persist.

To determine this, the research studied office REITS focused on New York City. The model indicated “office REIT investors believe remote-work practice to be long-lasting,” according to the report. Many U.S. corporations have announced permanent remote or hybrid work arrangements, and several have begun to shrink their physical footprint.

That was the basis for the report’s forecast of valuations dropping 39% by 2029.

The plunge will also affect the city’s business and retail properties, which has important implications for local public finances, according to the report.

For example, the share of real estate taxes in New York City’s budget was 53% in 2020, 24% of which came from office and retail property taxes. Given budget balance requirements, a drop in office and retail valuations would need to be made up for by either raising tax rates or cutting government spending. Either of these options would further negatively impact the attractiveness of the city as a place of residence and work, the study said.

Nevertheless, the work-from-home movement could spark new trends in office construction and renovation, according to the report. Declining office occupancy has prompted discussions on the merits of renovations of class-B or class-C office buildings into class-A structures or conversions into alternative uses such as multifamily.

Renovation projects make sense due to the higher value for high-quality properties and the expected slowdown of new office construction for years to come. Conversion projects make sense due to both a lack of affordable housing in large cities. Older buildings also tend to be more amenable to apartment conversion, according to the report.

Still, the study mentions there may be a role for local governments to play in order to subsidize the conversion of office buildings to housing.

“Future research should explore these implications and study the role for federal fiscal policy,” according to the report.

Illinois: Amendment 1 Could Lock In $1.8B Commercial Property Tax Hike

Statewide commercial property tax extensions are on pace to total $11.3 billion by 2026. Amendment 1’s expansion of government union power would likely accelerate that $1.8 billion increase.

It won’t just be households who pay higher property tax bills if voters OK Amendment 1: property taxes on commercial real estate have been increasing even faster.

If property tax increases continue at their recent rate, commercial property owners will shell out an additional $1.8 billion in annual property taxes by 2026, with the bulk of the increase – $1.6 billion – occurring in Cook County.

Statewide, commercial property tax extensions can be expected to hit a total of $11.3 billion during the next four years. The figure is estimated to be $7.9 billion in Cook County.

For individual commercial properties across Cook County, property tax hikes will vary widely by region. Commercial properties on the South Side of Chicago could pay an estimated additional $10,179 in property taxes by 2026. Properties in central Chicago could pay nearly $100,000 in higher property taxes during the next four years.

The increase in property taxes could wind up being much worse if Amendment 1 is passed on Nov. 8. The measure at the top of the ballot would allow government unions to make demands outside the normal scope of bargaining, strike if their demands are not met, thwart simple, pro-taxpayer reforms, crowd out government services for special interest causes and exacerbate corruption in Illinois.

Amendment 1 is a referendum on taxes in Illinois more than anything else. If property taxes simply continue to rise at their historical rates, businesses across the state will be asked to pay $1.8 billion in higher property taxes annually by 2026. Should government union bosses exercise new powers granted through Amendment 1, the tax hike on Illinoisans could wind up being far more costly.

That endless loop of unlimited union demands, higher government costs and rising taxes is likely why no other state has a similar amendment.

Illinois businesses already face challenges from a looming unemployment tax hike, property tax hikes, the nation’s third-highest number of regulations and the potential for a recession. Its business tax climate ranking dropped 10 places in five years as neighboring states rose or held steady. Amendment 1 could make a bad business climate worse.

The proposal threatens to hurt homeowners as well. Property taxes have been rising for decades in Illinois and without significant property tax or pension reform, property taxes can be expected to continue to rise. Currently, property taxes are on pace to rise by $2,149 for the typical homeowner during the next four years. Again, empowering government unions to make greater demands would likely accelerate those tax hikes.

Illinois voters have a decision to make before Nov. 8: either they can vote to fund the never-ending demands of government union bosses, or they can send a message by saying “no” to more tax increases in Illinois.

Ohio: Working with Appraisers in Property Tax Assessment Appeals

Recent turbulence in various market sectors is creating the need to sharpen analyses and understandings of property tax assessment valuations. In evaluating the need for real property tax assessment appeals, it is critical to understand the roles an appraiser can play in the appeal process. Early in the appeal process, an appraiser can help evaluate the tax at issue in a property tax challenge case by evaluating market data and market trends, or by providing an opinion of market value as of the statutory valuation date. Knowing the tax at issue is critical for appeal planning purposes. Why spend $3,000 on an appeal probably only worth $2,000? Perhaps later in the process, an appraiser may assist a property owner by providing an opinion of value in a form appropriate for the circumstances.

Appraisers as Expert Witnesses

Appraisers are routinely engaged as expert witnesses in real property tax assessment contests where property valuations are the primary issue. Knowledgeable and experienced appraisers use appraisal practices and procedures to analyze data and develop and report opinions of value accordingly. Tax authorities or judges receive appraiser testimony and review appraisal reports, often asking appraisers questions about items contained within appraisal reports. An appropriately developed and well-written appraisal report, testified to by a knowledgeable expert, is often an essential part of a successful assessment challenge.

Expertise Matters

In working with appraisers, it’s important to understand that there are different appraisal specialties and, depending on the circumstances, that expertise can play a significant role in the appraisal process. However, an appraiser may not have the necessary level of expertise for a particular appraisal assignment at the time of engagement; in this instance, the appraiser may agree to work to acquire the required level of expertise with the client’s consent. Depending on the type of appraisal, an appraiser may need to seek assistance from other experts, particularly when an in-depth investigation conducted by a specialist would be helpful or necessary to establish items including, but not limited to, capitalization rates, architectural feasibility, or construction costs.

Appraisal Methodology Also Matters

Ohio counties are required to reassess property market values every six years, and a separate adjustment is made in the interim three-year period to take into account recent sales of comparable properties and changes in physical characteristics, such as additions or removal of structures, if not previously addressed. Examining market values indicated by sale prices of similar properties in surrounding areas, or the sales comparison approach, is one method for determining current taxable value. Another method is the income approach, where the income producing aspects of a property are analyzed to determine its taxable value. The income approach is often used when reassessing commercial offices and other commonly leased property types. The cost approach is commonly employed for special use properties and is also relevant to consider for other types of recently constructed properties. Your appraiser needs to be skilled in utilizing and understanding all three approaches to value, whether pursuing, or defending, a tax appeal. Another consideration is that certain property types require attention to valuation methodology nuances that are pertinent to Ohio property tax law. Your appraiser must also remain aware of where the property is in the six-year and three-year periods. A skilled appraiser can help you protect your bottom line. It is important to discuss all your available options with your appraiser.

When considering the use of appraisers, it is important to note the protections that are available only when working with appraisers through legal counsel. An attorney’s communications with an appraisal expert are protected in Ohio, which can be critical when dealing with a property in uncertain circumstances, especially given the nuances in Ohio’s legal structure for property tax valuations.

Going Forward

The impact that House Bill 126 (HB 126), passed into law earlier this year, will have on property tax assessment appeals is uncertain. Aside from other considerations, dates of valuation are important factors. It is important to bear in mind that the valuation date for 2022 property taxes was Jan. 1, 2022, and involved a different set of market conditions than what Jan. 1, 2023, will bring.

Property owners and authorized tenants should carefully examine their assessments and obtain second opinions from qualified experts in complex situations.

Pennsylvania: Tax relief for Allegheny County homeowners from assessment ruling won’t come quickly — if at all

It has been nearly a month since a judge gave a victory to Allegheny County homeowners facing property assessment appeals brought by school districts and municipalities this year. But none of them should be counting on relief any time soon.

An appeal of Common Pleas Judge Alan Hertzberg’s Sept. 1 order by the Pittsburgh Public Schools has put the brakes on a quick implementation of the edict.

Judge Hertzberg ordered a big reduction — from 81.1% to 63.5% — in the number used in 2022 appeal hearings to determine the value at which a property will be taxed.

The drop in the number, known as the common level ratio, could be particularly beneficial to thousands of homeowners who were hit with appeals filed by school districts or municipalities after they bought their properties. Those appeals are often derided as a newcomer’s tax.

But with the school district appeal pending in the state’s Commonwealth Court, the county’s property assessment appeals board has so far refused to move ahead with the lower ratio.

“I think we’re in a holding pattern waiting to see what develops. We’re watching it very closely,” said David Montgomery, the assessment board solicitor.

At the same time, the state tax equalization board, known as STEB, has been reluctant to recalculate the common level ratio, as ordered by Judge Hertzberg, based on sales data submitted by the county.

In issuing the preliminary injunction to set the ratio at 63.5%, the judge ordered a separate recomputation by STEB, apparently as a backstop since the county argued that the state board was the only one that could set the ratio under law.

But in an email exchange with John Silvestri, the attorney for the nine property owners who filed the lawsuit that led to Judge Hertzberg’s Sept. 1 ruling, Nicole R. DiTomo, a senior deputy attorney general, stated that the state board would wait for the resolution of the appeal before recalculating the ratio.

The upshot is that it could be months or longer before the school district appeal is decided by the Commonwealth Court.

“The bottom line is that we are at a stalemate,” said Mike Suley, a former county property assessment director and appeals board member who is a consultant for Mr. Silvestri.

And that means homeowners — as well as taxing bodies — could have a long wait before their appeals are decided. The assessment board had not been issuing decisions on appeals pending a ruling by Judge Hertzberg.

It could remain that way for some time. Mr. Montgomery said the board may have to defer decisions on pending appeals “until we get a definitive” common level ratio to use.

“Even though Judge Hertzberg has issued his decision, the ratio may change due to the appellate proceedings,” he said.

In order to provide some relief for his clients, Mr. Silvestri may ask the assessment board to use for this year the 63.6% ratio that the state tax equalization board already has calculated for 2023.

He maintained there is nothing in the Second Class County Assessment Law, as it would relate to Allegheny County, that would prevent the assessment board from using the 63.6% this year.

But Mr. Montgomery argued that it isn’t that simple, particularly given that Judge Hertzberg has issued a preliminary injunction calling for the use of another ratio.

“Mr. Silvestri’s proposal to replace it with a different number, I think, would have to be ordered by the court. We wouldn’t have the power to do it ourselves,” he said.

At the same time, Mr, Silvestri has stated that there is nothing to prevent the assessment board or the state tax equalization board from carrying out Judge Hertzberg’s order while the appeal is pending.

However, Ira Weiss, solicitor of the Pittsburgh school district, said that under the rules of appellate procedure, there’s an automatic stay when a public entity files an appeal with Commonwealth Court.

While Mr. Suley has accused the district of using the appeal as a delaying tactic, Mr. Weiss said that was not the case.

“We don’t file appeals as delaying tactics. We file appeals because we have a good faith belief that the lower court did not act in accordance with” the law.

“Our goal is to have the Commonwealth Court review the case and hopefully agree with our position that the action by the Common Pleas Court was without legal foundation and that the case should have been dismissed,” he said.

The outcome of the case involves high stakes for homeowners and taxing bodies.

Currently a home valued at $100,000 in an appeal would be taxed at $81,100 using the 81.1% common level ratio in effect before the court decision.

Using the 63.5% ordered by Judge Hertzberg, the property would be taxed at $63,530. That would mean a substantially lower tax bill for the homeowner.

As one example, Mr. Suley said a Wilkinsburg homeowner whose assessment was appealed by the school district is facing a $2,053 increase in taxes based on the 81.1% ratio.

But at the 63.5% ratio, the owner’s current tax bill of $11,100 would actually decrease by $800.

On the other hand, a drastic change in the ratio could have huge financial consequences for municipalities and school districts counting on revenues from assessment appeals to help balance their budgets this year. Some experts have predicted that it could lead to millage increases for all property owners.

“The effect of this is a gut punch to the school district of the city of Pittsburgh and every other taxing body in Allegheny County,” Mr. Weiss said.

Nonetheless, Mr. Silvestri believes the district’s appeal could end up backfiring.

If the appellate court upholds Judge Hertzberg’s ruling, the district and other taxing bodies could be facing a “double whammy” next year, with the assessment board required to use the 63.5% ratio for appeals still pending from this year and the 63.6% ratio for appeals filed in 2023.

“Instead of having part of their budget problematic for this year and part of their budget problematic for next year, it will be double problematic for next year,” he said.

Florida: DeSantis announces a special session to address property tax relief after Hurricane Ian

The properties affected includes real property, homes or businesses destroyed or rendered uninhabitable by Ian’s impacts.

An executive order signed by Gov. Ron DeSantis Thursday will extend the deadline for property taxes on homes and businesses in the 26 FEMA-designed counties affected by Hurricane Ian.

DeSantis also announced the Florida Legislature will hold a special session before the end of the year to consider the property tax relief.

“I do not have the ability as governor to eliminate property tax obligations, so this will delay that payment date,” DeSantis said in front of a damaged Sanibel Island restaurant. “I want to give us time so the Legislature can come in sometime after the election but before the end of the year to provide rebates for the affected homeowners or property owners.”

The properties affected include real property, homes or businesses destroyed or rendered uninhabitable by Ian’s impacts.

“We want to make sure we are doing all we can to clear the burdens that folks are dealing with,” DeSantis said. “The debris is there, we can’t put that back together … but we can make it easier for people to get back on their feet.”

DeSantis said there will be a formal announcement on the session dates later.

Counties eligible for FEMA Individual Assistance include Brevard, Charlotte, Collier, DeSoto, Flagler, Glades, Hardee, Hendry, Highlands, Hillsborough, Lake, Lee, Manatee, Monroe, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns and Volusia.

DeSantis said the session could also address other issues related to the hurricane, including property insurance and helping local governments to pay for essential services.

EUROPE

France: French tax website now also shows properties owned: how to check

Information will be used to set your taxe foncière and any other property taxes owed

Tax officials have expanded the impots.gouv.fr website, used for tax declarations, to include details of all private properties owned – and have provided an English-language guide.

A separate service is available for people who own professional properties.

Where to find it

Called Gérer mes biens immobiliers, the property site has been available since last year from the personal log-in on the impots.gouv.fr site.

As well as listing all properties owned, it records features such as the number of rooms, surface area and cadastre lot numbers of these properties.

It is possible to download the information from the site to a spreadsheet.

Declare and pay online

The site should have a facility to declare and pay property-related taxes, such as the taxe d’aménagement, and from early next year to declare the occupancy status and rents from properties, as well as settle any tax bills which arise from them.

Only properties subject to property tax are included on the website. If you own barns or outbuildings that are not liable, for example, they are not included.

Any wrong details can be corrected by using the secure messaging system with the standard subject line J’ai une question sur le descriptif de mon bien immobilier.

Details on the site are the ones used to determine your taxe foncière – and any other property taxes that might be dreamed up in future – so it is worth checking they are as accurate as possible.

Separate professional log-in

It might take several weeks for properties to be moved from or added to the site after a sale – the information is gleaned from the tax records of the sale provided by notaires.

Where properties are not owned by individuals but by companies, they must be managed from a professional log-in at the impots.gouv.fr site.

The property or properties must be registered for the Gérer mes biens service to be included on the site.

Once they are, they can be found under the Démarches tab from the welcome page of the professional tax log-in, and include the same information as personal properties. People with more than 200 properties have a dedicated webpage.

Germany: Extended deadline for property tax declaration

Property owners in Germany will have three months longer to submit a tax declaration, state finance ministers revealed on Thursday.

The deadline for submitting the new property tax declaration will be pushed back from October 31st to January 31st, 2023.

The decision to extend the deadline was made by the state finance ministers and Federal Finance Minister Christian Lindner (FDP) at a meeting on Thursday. It comes after Lindner revealed that barely one in three property owners had submitted their declaration by the start of October.

Announcing the decision, Bavaria’s Finance Minister Albert Füracker (CSU) said that the extension of the submission deadline by three months would significantly relieve the burden on citizens, the economy, and tax consultants.

Lindner also welcomed the decision, telling reporters on the sidelines of the International Monetary Fund conference in Washington: “At present, there are other concerns and tasks that we have to take care of with priority.”

The FDP politician had previously argued for an extension of the deadline.

Property tax reform

The reform of the currently property tax system, which is due to come into force from 2025, is one of the largest tax reforms carried out in Germany since the end of the Second World War.

The revamp was prompted by a decision from Germany’s Constitutional Court, which found that the tax rates were calculated unfairly.

Under the current system, the value of a property is calculated using records from 1935 in East Germany and from 1964 in West Germany, meaning many houses and flats are dramatically undervalued.

Authorities must now revalue around 36 million properties using data submitted by the owners. This includes providing details such as plot size and living space, property type, construction year and the so-called standard land value via the government’s Elster tax portal.

However, experts have warned that the declaration is far too complicated for many people to fill out by themselves.

In addition, the reform has hit numerous technical snags along the way, with the Elster portal buckling under the excess traffic just days after tax authorities started accepting the property tax return.

Ireland: Property tax bill: “a great leap forward” says interior minister

The long-awaited property tax bill includes a compulsory levy on unoccupied accommodation.

The fulfilment of an aim set out by the government coalition four years ago, the property tax bill is “a great leap forward” says interior minister Taina BofferdingTaina Bofferding (LSAP). It was presented to the press almost exactly a year after prime minister Xavier BettelXavier Bettel (DP), on 12 October 2021, told MPs in his state of the nation address that he planned to “table a bill on the reform of property tax within the next 12 months”.

Indeed, in an interview with Delano in June 2021, Bettel had cited the example of a residence opposite his private home in Bonnevoie that has been empty for 25 years. “It has three apartments, but they [the owners] have no interest in renting them out. Have an annual tax that doubles, and people will soon understand we have a housing crisis caused by speculation.”

At the time, the prime minister said that a property tax bill would be a step in the right direction. “But if someone thinks we can wave a magic wand to solve the housing problem, they are mistaken.”

Tackling empty residences

The ministers announced the introduction of a compulsory national tax on the non-occupation of housing. It replaces the municipal tax on unoccupied accommodation introduced in 2008 which, the minister explained, did not yield the results expected by the government. A residence will be considered unoccupied if no person is registered in it for a period of six months. The municipality must then establish that the property is not occupied. The tax will be levied by the Luxembourg inland revenue and will amount to €3,000 per residence and will increase by €900 per year to a maximum of €7,500.

A property mobilisation tax will also be introduced. It is based on the establishment of a national register which lists all land available for construction under the general development plans. It will make a difference between land that is immediately available for construction and land that requires the completion of prior roadworks and public and collective infrastructures before it can be built upon.

“It is unacceptable that owners do not build housing on their land, even though it is intended for this purpose, while more and more people, young people, families, can no longer afford to live in Luxembourg,” said Bofferding.

National register to keep things ticking

The national register will aim to assign a unique identification number to all types of buildings and to each separate dwelling within each building. This will provide added value in many areas of administration for the benefit of citizens, scientific research and planning, states a press release from the ministries of interior, housing and finance.

“The aim is not to create an additional tax burden for citizens and companies, which in times of crisis and inflation would not be desirable,” said Yuriko BackesYuriko Backes (DP).

The bill also includes other reforms on property tax and the mobilisation of land and housing. It introduces a main residence tax reduction as a fixed amount for each taxpayer. The property tax will also remain a municipal tax. The government has set up an online simulator allowing citizens to estimate the amount of property tax they’d have to pay under the planned reform.

United Kingdom: High street braced for £3bn rise in business rates bill

Rates hike adds further pain to businesses struggling with soaring energy bills

Retailers face paying an extra £3bn next year in business rates, piling further pressure on the high street as costs soar and shoppers cut back on spending.

Business rates, which are a tax on company properties, are due to rise in line with inflation, which hit 10.1pc in September.

It means the overall business rates bill for companies across England is projected to jump by £2.7bn to £30bn from April, when the tax rises, according to property experts Altus Group.

According to the British Retail Consortium, retailers alone are set for an £800m tax hit next year as a result.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the tax surge is a double blow for retailers, pubs and restaurants as temporary Covid support measures are withdrawn.

He said: “Many firms are facing eye-watering tax rises next April as business rates rise with September’s CPI inflation, aggravating already diminished cashflows.

“This is particularly acute for those in retail, leisure, and hospitality, whose temporary 50pc rates relief expires in the same month.”

It comes as retailers battle soaring energy bills, rising ingredients costs and staff shortages even before rates go up.

A survey from the Federation of Small Businesses (FSB) this week showed that bosses are more pessimistic now than at any point except during lockdowns.

Separate data published by the Office for National Statistics on Wednesday showed prices rises facing manufacturing businesses are even higher than those hitting households.

Factories said their input costs last month were up by 20pc while the prices charged to customers increased 15.9pc on the year.

For services companies, prices charged are up by a more modest 6.6pc, though this is the highest level on record.

Martin McTague, national chairman of the FSB, said: “The prospect of business rates going up next April by 10pc is hugely worrying, and would be devastating for thousands of small businesses.

“With relief for businesses in hospitality, retail and leisure due to end around the same time, the impact on these industries will be particularly acute.”

Jerry Schurder at property consultancy Gerald Eve said rates have not risen this much since 1991, and will add another £3bn per year to already unaffordable costs.

He said: “The Prime Minister claims that her policies are designed for ‘growth, growth and growth’ but further business failures and shop closures will result unless the UBR [Uniform Business Rate] is frozen again.”

It comes as Jeremy Hunt, the new Chancellor, is seeking ways to save money or raise extra revenue to plug a hole in the Government’s finances and reassure financial markets he is serious about fiscal prudence.

This includes raising the headline rate of corporation tax, which applies to companies with profits of more than £250,000, next year from 19pc to 25pc. Those with profits below £50,000 will not face a rise in the tax.

A Treasury spokesman said: “Our business rates review led to almost £7bn of support to reduce the burden of rates over the next five years and brought about reforms which will make the system fairer, including further business rates relief and freezing the multiplier in 2022-23 to put the brakes on bill increases.”

Authors:

• 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 (IPTI) – a member of the EACCNY.