Reining in Property Taxes and Valuation
Burr, Kurt, Rucker, Gary, Journal of Property Management
Property taxes are one of the largest expense categories for income-producing property and thus are always a major candidate for cost-containment measures. There are a number of current trends that challenge property managers' ability to control property-tax expenses. Here is a look at some key issues affecting different types of properties.
Leasehold improvements in many office buildings are being double-taxed - charged to the tenant as business personal property and to the owner as capital improvements.
This situation arises when a tenant, instead of the owner, pays for buildout expenses. The tangible value of these leasehold improvements actually goes to the building owner. Appraisal authorities see these expenditures as capital improvements that add value to the property. Accordingly, they raise assessed value so that the building owner pays more in real-property taxes. In states that tax business personal property, the tenant may also pay taxes on the same expenses. "Leasehold improvements" is one of the standard categories, along with machinery and equipment, furniture and fixtures, computer equipment, inventories, and vehicles, that are taxed when used for producing income. When completing business personal-property renditions, tenants should show that leasehold improvements are associated with real property, not business personal property. One firm with a multi-floor lease space saved $50,000 in taxes a year by reclassifying leasehold expenses.
Another property-tax issue for office buildings is whether all leasehold improvements add value to the property. Building permits for leasehold improvements often trigger appraisal authorities to make blanket increases in property valuation. It has been successfully argued that only certain capital improvements, such as finishing out shell space to increase the amount of rental space, actually add value to an office building, while other expenditures such as accessibility improvements do not. A good case can be made that renovations to comply with the Americans with Disabilities Act do not increase the market value of an office building nor enable the owner to command higher rents.
Likewise, converting a chiller to eliminate CFCs in order to comply with the Clean Air Act is an expense that does not add value to a property. Other capital improvements that could be argued to fall outside of the "value-added" category include installing awnings for passenger drop-off, adding covers to surface parking, and replacing the exterior wall system.
Owners and managers of some retail centers are experiencing higher taxes because of their skill in management. Management-intensive properties, such as hotels, restaurants, mini-storage facilities and hospitals, have long recognized that business value is enhanced from intangible assets such as management, marketing skills, and reputation. …