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How to prepare for potential property tax increases

Michael Clayton

Michael Clayton
President, Byrne & Clayton Consulting LLC, Denver

This time of year, property taxes are at the forefront of the minds of owners, property managers, brokers and tenants. Recently I was asked what can be done to lower the property taxes passed through to the tenants. I spoke with Michael Clayton on this issue in depth.

Hedlund. Is a double-digit property tax increase looming?

Chris Hedlund

Chris Hedlund
Senior vice president, Sessions Group, Denver

Clayton. Separating property tax increases from actual value increases is an important distinction. Attention to the budgets of taxing authorities such as school districts, metro districts and county general funds is important because the revenue needs are calculated from aggregate valuations of classes and subclasses of property that the assessor reports.

There are built-in protections of arbitrary tax increases from the Taxpayer Bill of Rights and Gallagher Amendment. However, these provisions seem to better protect residential classes from arbitrary double-digit tax increases while commercial and industrial classes continue to absorb increasing tax liabilities. There are no provisions, such as tax caps found in other states that could prevent a single, individual property owner from double-digit percentage tax increases, or in some circumstances a “doubling” of actual value assigned to a specific property in a single tax period.

Preliminary discussions with the major metro Denver County Assessment Authorities revealed that double-digit percentage valuation increases are a very real possibility for many property classifications due to general property appreciation. As the valuation date for Colorado moves from June 30, 2014, to June 30, 2016, a full two years of property appreciation will be recognized for many property classes, and an individual property may experience an overwhelming increase.

Hedlund. What can owners and property managers do to keep property tax expenses in check?

Clayton. Property taxes are a significant expense category – often the highest expense category for some property classes, such as retail. There is a direct relationship with property taxes to desired and achievable property rents and sale prices. Ultimately, owners and property managers expect levels of reasonable and fair property taxes that have predictable relationships to property rents and sale prices of a smoothly operating property. Property taxes do cause disruptions with properties and can appear to be out of line for even the best, professionally managed property.

A few tips in the never-ending fight to control property tax expenses include:

  • Prior to acquiring properties, analyze the sale price and property tax expense relationship. There may be a property tax implication for future years from the acquisition price. Property tax risks should be identified in purchase price proposals. Although it may seem unfair that the assessor’s office has doubled the value of your property, confessing to an assessor that you’ve overpaid for a property can be a difficult proposition in changing the assessor’s viewpoint.
  •  Understand tenant-owned businesses genuinely are averse to property tax increases because earnings from their businesses may only absorb certain levels of taxation. It is not safe to assume that economic conditions will allow businesses to pass property tax increases on to prices of goods and services to paying customers.
  • Always open county time-sensitive mail immediately and review all county correspondence such as assessment notices and property tax statements to determine if the valuations and taxes are reasonable.
  • A general understanding of Colorado assessment and appeals process can go a long way toward a proactive position in monitoring property tax expenses. Obtaining and reviewing the assessor’s records every two years is recommended. The major counties have upgraded record systems providing extraordinary levels of data and service. In most circumstances, the information can be found on an assessor’s web pages. Specific information to the valuation may require a trip to the assessor’s office.
  • Compare assessor data with actual property data (sales comps, rents, vacancy, expenses, cap rates, etc.).
  • Utilize attorneys, appraisers or consultants, as appropriate and necessary, to assist in determining if property data warrants an assessment appeal.
  •  Be prepared in the marketplace to absorb portions of property tax liabilities, if necessary, to retain tenants and stay competitive.

Hedlund. Are tenants becoming more sophisticated in dealing with property tax increases?

Clayton. Clearly tenants are becoming more sophisticated in this area. We are seeing that some tenants, especially those with regional and national presence are negotiating tax limits and, occasionally, caps where their taxes cannot exceed a certain amount on an annual basis. This can become a challenge when sizeable value increases or tax rate increases are experienced. This also can become a challenge when tenants see significant differences in assessments or tax rates from one county to another or even in tax districts within the same county. Tenants in high tax rate areas often find themselves taxed out of a location, causing them to seek a location with taxpayer-friendly lower tax rates.

Hedlund. What are the dates that owners and property managers need to be aware of in the property value appeal process?

Clayton. Important dates are as follows:

  • Colorado notices of value will be issued by May 1.
  • Regular administrative level appeals must be filed by June 1.
  • Many County Board of Equalization level appeals must be filed by July 15, or the extended appeal period for counties who elect those deadlines.
  • State Board of Assessment Appeals level appeals must be filed within 30 days of receipt of notice of determination from County Board of Equalization.
  • Taxpayers have two years from the time taxes are levied in order to file an abatement petition seeking refunds for prior year’s taxes paid, if appeals were not filed in those previous two years. Jan. 1, 2018, would be the deadline for a taxpayer to file an abatement petition for the 2015 tax year, taxes payable 2016.

Hedlund. Regarding the assessor inquiries for property information, should owners and property managers provide the data requested?

Clayton. In most circumstances, taxpayers may voluntarily respond to inquiries for financial information, property inspections and sales verification that assist assessors in their work. The taxpayer is not, or should not be, penalized for the failure to respond to inquiries.

However, an opportunity may arise where responding may be beneficial to reducing property tax liability, such as informing the assessor of chronic vacancy, under-utilized space and improvements, deteriorating conditions both physical and economic, functional problems, or any wide-ranging issues that property owners must overcome. During the appeals process, there becomes a definite requirement for owners to respond to inquiries.

Hedlund. Could any required future property capital expenditures be argued to lower the taxable value of the property?

Clayton. In my view, capital expenditures, whether incurred or planned, should be reviewed to determine their impact on property tax liabilities. Assuming required or planned capital expenditures are related to major repairs, deferred maintenance or to correct functional issues, those facts may lead to a downward property condition or functional utility adjustments. Evidence from invoices, written bids and estimates, property reports and photos will be useful to support a position.

Many times, expenditures are related to betterments, improvements to property or new construction that may lead to more taxable property. In many appeals, the required base period and the taxpayer’s timing of capital expenditures may not align, or insufficient evidence is presented leading to an unsuccessful argument.

Hedlund. Who has the burden of proof?

Clayton. Many successful overvaluation appeals are a result of collaborative efforts by taxpayers of identifying key issues and submitting appropriate facts and valuation evidence to the assessor’s staff early in the appeals process. Our taxpayer bill of rights in the Colorado Constitution provides that assessor’s valuations are not to be presumptively correct. However, court proceedings over the years have touched on this matter by holding that the burden of proof is on the taxpayer to establish the basis for a reduced valuation of property.

Hedlund. Are there any other creative strategies that you can share?

Clayton. I would be remiss by not recommending to owners and property managers to seek expert assistance with annual assessment and tax reviews. In most circumstances, a routine and professional review can be accomplished at no initial cost to the owner or property management firm. This reduces the liability to the investors or property management firm of missing an unlawfully taxed property or a missed tax savings opportunity. Taxpayers can leverage the expertise and experience of outside vendors to include discussions with assessor’s staff throughout each appraisal cycle.

Featured in CREJ’s May 3-16, 2017, issue.

Edited by the Colorado Real Estate Journal staff.