Member News

IPTI | Update on U.S. & European Property Tax Issues: November 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: ‘This Will Be A Battle’: Landlords Prepare For Property Tax Fights As Values Slide

Owners of New York City real estate, whose taxes make up a sizable portion of the city’s revenue, are gearing up for a possible fight with the Tax Commission next year as the impact of the pandemic continues to wreak havoc on the local economy.

Real estate-related taxes made up 53% of total New York City tax revenue last fiscal year, according to the Real Estate Board of New York, and property taxes make up the lion’s share of the payments. But with many property owners now dealing with commercial and residential vacancies, low leasing volume and tenants unable to pay their bills, some landlords say their ability to meet their tax obligations is imperiled.

Attorneys and accountants are preparing for a spike in the numbers of owners who will fight the city in the next fiscal year, potentially further jeopardizing the city’s cash flow amid the health and economic crisis.

“I think we are going to have to fight very hard, we may have to take many matters in front of a judge and go to trial,” said Joel Marcus, an attorney at Marcus & Pollack who specializes in tax certiorari, a term which refers to the process in which owners appeal their property assessments.

“I don’t think it’s going to be pretty, what the property owner is justified in demanding and what the city is prepared to offer is a big gap, in my estimate … even if there were significant reductions, they might just raise the tax rate and collections.”

Property taxes are based on values as of Jan. 5 and paid half July 1 and again on Jan. 1, Marcus said. Each year, thousands of owners petition to have their values lowered, as a matter of course. What is different this year is that the real estate community is paying taxes based on values before the coronavirus hit the city.

Marcus said he has some clients now claiming properties are worth around 50% less than before — and while most have accepted there will be no ability to shift this year’s payments, Marcus expects many will be arguing to pay less tax next year.

“I think it’s going to be a very challenging year, because the values have significantly decreased in every sector,” he said. “Property owners are looking for very significant tax reductions, but balanced against that, the city of New York has greater need than ever for revenues.” “This will be a battle,” he added.

Rosenberg & Estis Property Tax Department Leader Benjamin Williams said he hasn’t seen a plan from the city about how the crisis will be dealt with.

“People got offers this year from the Tax Commission, and it was like COVID never happened,” he said. “But I’m not surprised because the Tax Commission never indicated they would give reductions because of COVID. There is a disconnect between expectations and legal reality.”

He said many of his clients are instead trying to work out deals with their lenders to conserve cash. Still, he expects if the city’s Department of Finance doesn’t cut assessments next fiscal year, the Tax Commission will be inundated with protests.

On July 1, the city reported a 6% increase in property tax collections, Crain’s New York Business reported. Some $15.2B in taxes was into the city as of Oct. 15. However, analysis by the publication found the delinquency rate in the commercial property sector is now at 4% — double the rate from last year.

Overall, the city is preparing for a $13.5B budget shortfall over the next two years, and both the city and state are being hit with a $1.4B tax revenue loss from last year, thanks to a 34% drop in residential and investment sales volume, per REBNY data released Thursday.

Across the board, real estate players are pinning their hope on a federal bailout. But GFP Real Estate co-CEO Eric Gural is hoping for local action and more understanding from the city.

“No one pays sales tax on things that are free, but some of the owners are feeling, ‘Well, I’ve lost a tenant and I’m being taxed as if I haven’t,’” he said.

GFP’s portfolio of approximately 11M SF of commercial space in the city had a 1% vacancy at the start of January, but Gural said his company is only collecting 70% of its expected rent.

He said he was hoping the city would give him a break on his taxes this year, considering the unprecedented nature of the crisis, as he has been offering relief to tenants wherever possible.

“I don’t want to put anyone out of business,” he said. “At the same time, I don’t want them to collectively put me out of business.”

He thinks landlords to industries that haven’t suffered as significantly in the city — notably the owners of buildings leased to Amazon, Facebook and Google — should be helping out more, as property owners did in the 1970s when they prepaid their taxes. “Everyone is in dire straits, and some people are worse off than others,” he said.

Multiple calls to representatives for the New York City Department of Finance were not returned. Citizens Budget Commission Director of City Studies Ana Champeny said the city’s expectation is that payments in the new year won’t drop off significantly and that July 1 payments were encouraging. Still, she said, a looming potential decrease in valuations — and how badly the city’s real estate values are hit — is a concern for the city long-term.

“While there may be some decrease in collections and an increase in delinquency rate, the major problem, generally, is commercial real estate values going forward,” she said. “You could have a drag on property tax revenue for a few years.”

She noted that the city has built in a cushion to prepare for any non-payments, but Jan. 1 tax payments could be worse than July 1, as many businesses are no longer benefiting from the Paycheck Protection Program and people out of work are no longer receiving federal unemployment.

Anchin, Block & Anchin Real Estate Group co-Chair Robert Gilman said some of his clients haven’t put aside enough to cover the Jan. 1 payment, and he expects there will be more owners fighting real estate tax assessment than ever before.

“The last thing we want to do is not make the payment … some landlords are trying to refinance debts or restructure existing debt, some have a low loan-to-value ratio,” he said. “But there are some real estate companies out there that are not sure what they are going to do.”

Texas: Office Trends Raise Property Tax Concerns

With property taxes comprising a significant portion of the real estate operating budget at most companies, both tenants and landlords need to understand how trends sparked by COVID-19 can impact their property tax valuations.

The pandemic has spurred governments to impose unprecedented restrictions on office capacity and fueled widespread uncertainty among companies that own or lease office space. Organizations are asking if, when and how they will use their offices in the months ahead and are scrutinizing expenses to reduce costs.

Many businesses are reevaluating their space requirements after adopting work-from-home initiatives, while greater familiarity with Zoom and other applications that support remote training and online collaboration has firms reconsidering their ongoing need for conference or meeting space. It is essential for real estate decision makers to monitor the effects of such trends on taxable property values.

In the early 1990s, it was common for companies to occupy 350 square feet of office space per person. This requirement changed as some businesses sought to maximize density and encourage collaboration.

In a COVID-19 world where social distancing precludes density, many companies are limiting the number of employees returning to the workplace. Some companies have adopted permanent work- from-home policies. If this trend continues, office tenants may renegotiate leases to occupy smaller spaces, or decline to renew.

Taxpayers working with assessors need to understand renewal probability, which measures the likelihood of a tenant renewing its lease during the holding period. Before the pandemic, renewal probability in a given market may have been 80 to 90 percent, while a post-COVID renewal probability could well be 50 percent or less.

Because assessors typically value property annually, they seldom consider renewal probabilities. Given the uncertainty of a pandemic, however, property owners need to discuss renewal plans with any tenants that have leases expiring within the next twelve months, and then share that information with assessors.

If there are a significant number of tenants at risk of vacating — and this is a trend that is being observed in the market — the assessor may need to adjust the capitalization rate used in the income approach to value the property.

Owners of office buildings operating at stabilized occupancy levels for their markets must work with assessors to evaluate and analyze their vacancy risks. Buildings that lack stable occupancy rates as of valuation dates will face additional challenges as the pandemic continues.

When working with assessors, owners must properly forecast an appropriate absorption period for their vacant office spaces, in addition to projecting appropriate costs to build out spaces for occupancy. With the volume of office space offered for sublease increasing at a record pace across the nation, and often at below-market rental  rates, taxpayers and assessors  must consider an additional layer of competition that could create downward pressure on rental rates for direct office space. An office building that may have reached stable occupancy in 12 months in a healthy real estate market could now require 24 to 36 months to stabilize.

COVID-19 has also ushered in new health and safety measures that office owners and operators may be required to address when building out office space. Touchless entry systems, improved HVAC and filtration, and antimicrobial construction materials are just a few build-out responses companies are evaluating to bring workers back into the office safely.

If these additional costs become standard, they must be considered in a lease-up analysis. Furthermore, these calculations must include any additional time needed to complete build outs at a time when construction crews across the nation are operating under their own COVID policies.

Office protocols will likely continue to evolve into 2021. That makes it important for users of office space to save all documentation that may have a bearing on the property’s net operating income. This includes rent relief agreements, renewal information, relocation requests, lease terminations, build out costs and other records to help ensure the assessor can properly consider all factors affecting the valuation for the upcoming tax year.

For the next few years, office space will remain at risk for declining values at least until a vaccine can be developed and properly administered across the nation. In this challenging period, it will be critical to ensure that assessors appropriately weigh all relevant documentation when selecting metrics in property tax valuation models.

California: Voters Rejected Prop 15

Proposition 15 came close, but it failed to win enough support from California voters to carry out an ambitious overhaul of the state’s commercial property tax system.

The measure is currently trailing, 51.8% to 48.2%. Votes are still being counted, but the Associated Press called the race on Tuesday.

As a result of Prop 15’s defeat, businesses will continue to pay property taxes based on rules laid out under Proposition 13, the historic tax-cutting measure passed in 1978.

Prop 13 has been popular for decades, but it’s also been a target for progressive reformers for just as long. Despite this loss, some say the results show that millions of California voters favor changes to create a more equitable property tax system.

“[Prop 15] touched the third rail of California politics, and came closer than anybody ever has before — perhaps closer than a lot of political figures could have predicted,” said USC sociology professor Manuel Pastor.

But for business groups that opposed the initiative, the result is a resounding defeat for reform efforts.

Prop 15’s defeat “should send a clear message to the proponents and warn all politicians that voters will continue to reject attempts to dismantle Prop 13,” California Business Roundtable president Rob Lapsley said in a statement.

Under Prop 13, property tax bills are generally based on what businesses originally paid for their properties — not on the current market value of those properties. These rules give lucrative tax advantages to long-term property owners. Beneficiaries include legacy companies like Disney, Intel and the owners of the high-end Orange County shopping mall South Coast Plaza.

Prop 15 would have instead taxed commercial and industrial properties on their current market value, with some exemptions for small businesses. That change could have raised an estimated $6.5 to $11.5 billion a year in new tax revenue for public schools and local governments.

The Yes on 15 campaign’s big funders included public sector labor unions and Facebook CEO Mark Zuckerberg’s Chan Zuckerberg Initiative. Major donors to the No on 15 effort included private equity giant Blackstone and large office landlords such as Douglas Emmett Properties.

The measure performed better locally, with about 53% support among L.A. County voters.

“California’s challenges are not going anywhere, and this election result has shown that there is strong public demand for closing the corporate tax loopholes which cost our local communities billions every year,” Yes on 15 campaign spokesperson Alex Stack said in a statement.

Tax policy experts said Prop 13 protections remain popular with many voters. For others, bad timing may have been a factor. The measure would not have taken effect until 2022, but some voters may have been turned off by the idea of raising taxes during a pandemic-induced recession.

“This was probably viewed as a big sweeping change to Prop 13, and it triggered risk aversion in a certain component of the electorate,” said UCLA tax law professor Kirk Stark. “Rarely do people, in the face of uncertainty, embrace change.”

With the state facing revenue shortfalls for some time to come, USC’s Pastor said state legislators may have to consider raising marginal income tax rates for California’s wealthiest residents (who already face the highest state income taxes in the nation) or introducing new sales taxes, which would fall more heavily on lower-income residents.

Or, Pastor said, “The state legislature itself may go back and start to take a look at what it can do with regard to property taxes.”

Colorado: Voters Repeal Gallagher Restraint on Residential Property Taxes

Voters have repealed Colorado’s Gallagher Amendment, according to the Associated Press. According to ballots counted as of 10 p.m., about 58 percent of voters supported Amendment B, the effort to eliminate the fiscal restraint from the state’s constitution.

“I think it’s wonderful that Coloradans have decided that it’s time to get tax policy out of the constitution. It’s outdated and it doesn’t reflect Colorado as it is today,” said Carol Hedges, executive director of the Colorado Fiscal Institute.

The constitutional amendment, approved by voters in 1982, has reduced homeowners’ property tax bills in Colorado for decades, saving them billions of dollars that would otherwise have gone toward schools and local services.

“What’s on my mind is that given enough money and given enough lies, even the good voters of Colorado can have a bag of wool pulled over their eyes,” said Dennis Gallagher, the former state lawmaker who wrote the original amendment.

“I think we’re going to as taxpayers be a lot more vigilant in Colorado as schemes come forward to try to increase home taxes.”

He predicted another “California-type property tax revolution” as the repeal of Gallagher allows property tax bills to increase in future years.

A bipartisan group of lawmakers put the repeal on the ballot, saying that repeal was crucial amid the COVID-19 fiscal crisis. If it stands, Gallagher is set to once again slash the property tax assessment rate in 2021.

Supporters of the repeal argued that Gallagher has had unexpected effects, due to the way it combines with the Taxpayer’s Bill of Rights. They argued removing it from the constitution would help “stabilize” government revenues.

The 1982 amendment was originally meant to limit the portion of property tax money that comes from homeowners, as opposed to businesses. It has done that — but it has had the additional, unintended effect of shrinking the total amount collected from property taxes in some areas.

Gallagher has been especially painful for rural areas, which do not have a cushion of growth to protect them from its effects. Meanwhile, large cities like Denver have seen their property tax revenues grow at a relatively slow rate, despite massive development.

The repeal campaign reported nearly $4 million in spending through mid-October, with significant support from magnates Kent Thiry and Pat Stryker. The opposition campaign reported less than $100,000, with messages focusing on the idea that Gallagher is part of the system of laws that limit government spending in Colorado.

Critics said that lawmakers should have figured out a more specific fix to help rural areas, rather than repealing the entire amendment. They argued that Amendment B represents a tax increase, since it would prevent future tax cuts. Dennis Gallagher, the author of the original amendment, said that repeal would hurt middle-class homeowners.

The proposal would not directly lead to higher bills, compared to the present. Instead it would lock the assessment rate at its current level, although lawmakers could change it.

California: Proposition 19 Passes: Voters Give Property Tax Breaks A Makeover

Vote count updates showed Proposition 19 was approved with 51% support. The measure allows homeowners 55 and older, the disabled and wildfire victims to carry low property tax rates with them when they move. But it also strips property tax breaks from people who inherit property.

It is a big victory for the California Association of Realtors, which made major changes to a similar initiative in 2018 that voters rejected by 20 percentage points.

The revamped proposal generated broad bipartisan support and only token organized opposition.

Under 1978 rules established under the landmark Proposition 13, property taxes are set at 1.1% of the sales price and increase no more than 2% a year for inflation until a property is sold, a system that can create huge savings for people whose homes greatly appreciate.

The newly approved Proposition 19 allows people 55 and older, the disabled and wildfire victims to carry their low property tax assessments with them when they move. The exemption is expected to fuel home sales by encouraging people who were reluctant to move because their tax bills would rise sharply.

Unlike two years ago, the 2020 version prohibits people from keeping their low assessments when they inherit properties and don’t live in them, using them instead for rental income.

The exemption for older homeowners and others will cut into property tax revenue but that will be more than offset by gains from ending breaks on inherited property, yielding a net gain that the state Legislative Analyst’s Office estimates could reach hundreds of millions of dollars a year each for schools and local governments over time. Most of the new money would go to fire protection.

A vote of more than two-thirds of both houses in the state Legislature placed the measure on the ballot this year. In 2018, the Realtors Association got on the ballot by gathering voter signatures.

Labor unions became allies. The California Professional Firefighters union spent money to defeat the 2018 measure and became a co-sponsor of the 2020 version.

Advertising saturated airwaves with a message on how the money would aid in fighting wildfires.

Josh Pulliam, consultant for the Yes on 19 campaign, said the 2020 version had “much broader appeal” and resulted from backers of the 2018 measure taking into account changes that other groups wanted to the 1978 tax-setting rules, which are enshrined in the state constitution. “It was about finding common ground, so you ultimately have a better result,” he said.

Supporters raised $63.8 million, including $58.6 million from the California Association of Realtors and $4.9 million from the National Association of Realtors. Opponents raised less than $50,000.

In 2018, the brokers group raised far less money, a signal of how much more confident it was this time around.

The measure competed for attention with another proposition that would have partially dismantled the 1978 rules by reassessing commercial and industrial property every three years, instead of tying it to the sales price. Voters narrowly rejected Proposition 15.

EUROPE

Greece: ENFIA’s complex equation

The recommendations of property surveyors for major hikes in the zone rates will undergo extensive scrutiny by the government, whose top objective is for the majority of owners to pay less than, or at least the same toward their Single Property Tax (ENFIA) next year as this year.

The draft budget provides for the collection of about 2.6 billion euros in 2021 from all property taxes.

The Finance Ministry is aware that the expansion of the system calculating property prices for tax purposes – known as objective values – to more areas, the increase in zone rates as proposed and the declaration of hundreds of thousands of square meters of properties settled during 2020 will lead to additional taxable material of at least €100 billion.

This stock can be used to finance the ENFIA discounts, which also affect the supplementary tax on large properties, and lead to a drop in ENFIA dues even in areas where the zone rates will see a 20 percent hike.

Through that cocktail of measures, which will favor mainly those with small properties, it is certain that owners with assets in areas with a reduction or no change in their zone rates will pay less ENFIA next year, along with those where zone rates will rise by up to 10%-15%.

The owners set to pay more will constitute a minority. They will be those with assets in areas to endure zone rate hikes of more than 30%, justified by the specifics of each area. Their list will include particularly popular areas such as tourism destinations that are currently undervalued in tax terms mainly because to date they have been kept out of the objective value determination system.

The entire ENFIA construction for 2021 will require plenty of preparation so as to match the new ENFIA discount rates with the adjusted objective values and the ownership brackets.

To achieve the desired result, the entire package of interventions will be activated after June 2021 – i.e. very close to the time when next year’s ENFIA will be calculated.

United Kingdom: Supermarkets urged to pay back £1.9bn COVID-19 business rates relief

MPs have made calls for supermarkets to pay back the £1.9bn in business rates relief they were awarded to help them through the coronavirus crisis. Some, such as Tesco and Sainsbury’s have already restarted paying out millions dividends to shareholders, according to a former minister in prime minister Boris Johnson’s government.

In March, the government introduced a year-long break in the payment of business rates across England and Wales, amid fears businesses may struggle to feed the country at such a crucial juncture.

However, grocery businesses have thrived under lockdowns, with many consumers rushing to the only open shops on the high street to stock up on products such as tinned goods and toilet paper.

Data compiled for the PA news agency by real estate adviser Altus Group projected that Tesco, Sainsbury’s, Asda, Morrisons, Aldi and Lidl are in for a saving of £1.87bn.

Atlus said that Tesco, alone, was expected to receive a bump of around £585m from the tax break, while Sainsbury’s would receive £498m.

According to reports in the Guardian, Esther McVey, the Conservative MP for Tatton, said: “Supermarkets need to hand back the £1.9bn of government support. They don’t need it.”

The MP, who previously served as UK housing and planning minister, said the money could be directed towards the owners of small limited companies instead.

Shareholder dividends have seen a huge hit this year due to pressures put on businesses amid the pandemic. UK dividends fell 49.1% in the third quarter, dropping to £18bn. This is the lowest total for Q3 for a decade, when companies were still grappling with the fallout from the financial crisis.

Alongside supermarkets, BAE Systems and engineering concern, IMI, became among the first companies to catch up on all the dividends missed year-to-date.

Berkeley Group, which had rescinded a big special payout earlier in the year paid a very large interim, five times bigger than 2019, to make up some of the lost ground. Others, like Direct Line, restarted their payouts.

United Kingdom: An extended lockdown in England could shut some shops for good, bosses say

Non-essential retailers say they are losing £2bn a week of pre-Christmas sales. More than 60 leading retailers in the UK have said shops that are not allowed to trade before Christmas may never reopen.

The group, comprised of business leaders from companies including Harvey Nichols, Burberry and Marks & Spencer, has called for all retailers to be able to open by the start of December.

In a letter to the Times, the retailers said the closure of non-essential shops under the national lockdown in England had put “hundreds of thousands of retail jobs at risk” and was threatening to sink businesses.

“A continued period of retail closure will see more shuttered high streets and many more job losses at the heart of the festive season,” the signatories wrote.

The letter also pointed to a recent paper from the government’s Scientific Advisory Group for Emergencies (Sage), which said that closing non-essential shops would have a minimal impact on the spread of coronavirus.

“Retailers have invested hundreds of millions in making their stores Covid-secure, keeping both customers and staff safe,” the letter read. “Yet retail stands on the brink, and decisive government action is needed to save it. Retailers of all shapes and sizes must be allowed to reopen by the start of December.”

November and December account for more than a fifth of all retail sales, the group said, with the closures depriving non-essential businesses of around £2bn each week in sales.

According to research conducted by the British Retail Consortium, between 5 and 8 November, footfall fell by 75% year on year.

Helen  Dickinson,  the  chief  executive  of  the  BRC,  said  the  closure  of  non-essential  retail  was “compounding the challenges facing our high streets”.

“‘Non-essential’ stores are estimated to be losing £2bn per week during lockdown, yet rents continue to mount, and the business-rates cliff edge is looming,” she said. “All the while, government reports show the impact of closures on Covid transmission is low.”

On Saturday, the bakery chain Greggs announced it is to cut more than 800 jobs as result of the coronavirus pandemic.

The firm’s CEO, Roger Whiteside, said that if sales remained at the levels seen during lockdown, Greggs “will not be profitable as a business”.

Earlier this week, WH Smith revealed it was planning to close 25 high-street stores, after sales fell 19%, leaving it £280m in the red.

United Kingdom: Councils pile pressure on firms over unpaid business rates during pandemic

Local authorities have begun to turn up the heat on businesses that have been unable to pay rates bills during the pandemic, with some pursuing claims through the courts.

According to property consultancy Colliers International, an increasing number of clients are receiving letters demanding payment or court summons.

Office occupiers were not granted a business rates holiday during the Covid-19 crisis, unlike retail and leisure firms, but many have been left empty due to lockdown, restrictions on travel and social distancing rules.

Colliers said one West London council had launched legal action against a Money Exchange shop, where the business did not get a grant but was not entitled to rates relief.

The company is now being chased for payments through the courts during the second nationwide coronavirus lockdown.

In Hampshire, a local authority issued final notices to businesses in June, at the height of the pandemic, Colliers said.

It will now only accept catch-up payments with costs included or a full-year’s liability paid up front.

An unprecedented 183,000 companies have begun a business rates appeal process between April and September, averaging more than 1,000 per day, as the number of firms citing a Material Change of Circumstance soared.

John Webber, head of business rates at Colliers, said the surge has put the consultancy firm on a “war footing”.

Webber said: “We have been negotiating on our client’s behalf with local billing authorities requesting them to show leniency to businesses that are struggling to pay their bills. We are finding that attitudes vary greatly depending on where businesses are based and the attitudes of the individual billing authority.

“There is a total lack of consistency – some clients for example with properties across boundaries find they are granted reliefs for some of their properties by certain local billing authorities but not from others.”

He added: “And recently there has certainly been a step up of enforcement activity via the courts. It’s ironic that whilst many businesses have been forced to empty their offices for a second lockdown, the courts are being kept open in this period to deal with the backlog of cases.

“As a result, we believe we’ll see more court summonses and enforcements as we go forward.”

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.