When Vacancy Rates Trigger Potential Tax Refunds

Michael Clayton

Markets are changing. Not only are the financial impacts of the pandemic lingering, including the remote-work trend, but commercial real estate owners and investors are facing headwinds and continued uncertainty such as long-term lease obligations and creditworthiness and new challenges in re-leasing vacated space.

Commercial real estate vacancy rates are an important value characteristic and can have a major impact on a property’s assessment. And if property rates have been overvalued, owners and investors could potentially pursue tax refunds.

What are some tips and tactics to consider?

Check Data Behind Assessed Value

Assessors appraise various classes of taxable commercial property, generally grounded to the concept of market value and with the objective of assigning uniform, equitable values. Mass appraisal models can produce or miss an important value characteristic, such as high and chronic vacancy.

Properties that declined in value through increased vacancy, major tenants moving out, downsizing, or concessions that negatively affect property value often see assessments exceeding fair market value, making them excellent candidates for assessment appeals.

Office and retail properties typically fit this definition, especially with the challenges they face with declining occupancies and rents.

For income-producing properties, a real estate tax professional typically reviews the most recent year-end income statements and rent rolls to determine if the data supports the assessed values.

Detailed cost data is necessary for recently constructed or recently renovated properties. Closing statements for recently acquired assets are also needed as part of an analysis.

How the Property Assessment Process Works

Real property assessment procedures can be complex.

After you receive a valuation notice from an assessment authority, a tax professional can help:

• Review and analyze data as well as information secured from the assessment jurisdiction to determine if assessed values are fair and equitable
• Identify and quantify issues causing excessive assessed values
• File assessment appeals when valuations are excessive
• Initiate informal negotiations with assessing jurisdictions
• Attend hearings, as necessary, at state and local assessment appeals boards, preparing and presenting appeal evidence

As market changes affect commercial real estate vacancy rates, these can have a major impact on a property’s assessment and create an opportunity to explore appeals of tax assessments.

Michael Clayton is managing director for Moss Adams in Denver. He has practiced property tax since 1986,