The recent shifts in interest rates and the broader economic landscape offer a strategic opportunity for commercial property owners to reduce property tax assessments. This strategy involves leveraging the effects of the COVID-era's historically low interest rates and the subsequent rise to contest inflated tax valuations. Investors who understand the nuances of property tax laws and recent market dynamics can potentially secure substantial savings. Here’s how to navigate this opportunity before it slips away.
Understanding the Impact of COVID-Era Interest Rates on Property Taxes
During the early 2020s, interest rates hit record lows, which significantly boosted commercial real estate prices. Investors acquired properties at elevated prices due to low borrowing costs, often securing favorable mortgage rates as low as 2.10% for 30-year loans. However, these market conditions were temporary, and today’s environment is vastly different. The federal funds rate has increased substantially since then, and although the Federal Reserve recently cut rates by 0.5% in September 2024, mortgage rates still remain much higher than during the pandemic.
The stark contrast between the historically low rates of the early 2020s and the higher rates seen today creates an opening for commercial property owners. The opportunity lies in challenging property tax assessments based on purchase prices set during the low-interest-rate period. These assessments may not accurately reflect current market values, given today’s higher borrowing costs and the slowdown in commercial real estate activity.
Why Commercial Property Owners Should Act Now
Tax assessments typically rely on a property’s market value as of a specific date, often January 1st of the tax year. With the significant rise in interest rates, property values in many commercial sectors have declined due to higher operational costs, tighter lending standards, and slower rent growth. Commercial property prices have fallen by approximately 21% since their peak in March 2022, according to Green Street’s Commercial Property Price Index. This trend provides a compelling case for seeking property tax reductions.
However, time is of the essence. As the assessment year becomes further removed from the low-interest-rate period, the more challenging it becomes to argue that an inflated tax valuation is outdated. To maximize the chances of a successful appeal, it’s crucial to act while the economic impacts of the post-COVID market transition are still influencing valuation methods.
Steps to Take When Seeking a Property Tax Reduction
Evaluate the Property’s Current Market Value:
Start by understanding how the property's value may have shifted since its purchase. Consider the effects of higher interest rates, inflation, vacancy rates, and rent growth on the property's worth. If the initial valuation was based on the lower interest rates and higher sales prices of 2020-2022, the current market value may be lower than the assessed value.
Understand the Assessment Process and Legal Requirements:
Each jurisdiction has different rules regarding property tax assessments. Typically, assessments are based on a percentage of the property's market value at a fixed date. Learning how the assessor determined your property's value and understanding the legal standards for assessments is crucial. If the assessor relied heavily on sales data from the pandemic period, you may have grounds to challenge the current valuation.
Prepare Evidence to Support a Lower Valuation:
When challenging the assessment, you need to present a compelling case backed by data. This can include comparisons between the lending environment at the time of purchase and the present day, as well as factors such as inflation’s impact on operating costs and tighter lending requirements. Demonstrating that the market conditions used to justify the original valuation are no longer valid can strengthen your argument.
Consider Hiring a Qualified Appraiser:
Engaging an appraiser with expertise in the local market can provide an objective valuation that reflects current market realities. An appraiser can also serve as an expert witness if the case goes to trial, offering valuable insights into market conditions that may support a lower tax assessment.
Be Prepared for Negotiations or Litigation:
Many tax appeals are settled before reaching a trial, but being prepared for litigation can increase your chances of success. Property owners who come equipped with thorough evidence, a clear understanding of the law, and expert support are more likely to secure a favorable outcome.
Key Market Dynamics to Leverage in Appeals
Several current trends are driving property values down and can be used to argue for lower assessments:
●Interest Rate Increases: Higher borrowing costs have dampened commercial real estate demand, putting downward pressure on property values.
● Slow Rent Growth and High Vacancy Rates: These factors reduce potential revenue, which should be considered in property valuations.
●Increased Operational Costs: Inflation has pushed up expenses such as insurance, maintenance, and tenant improvement costs, impacting net income and market value.
● Tightened Lending Standards: Strict terms for new loans and a decline in commercial real estate lending activity further support claims that property values have declined from their pandemic-era peaks.
The Closing Window: Why Timing is Critical
The opportunity to benefit from the COVID-era interest rate cuts in tax assessments won’t last forever. As the years pass, conditions tied to the pandemic-era market will carry less weight in valuation appeals. The further assessments are from the 2020-2022 period, the less relevant those factors will become. Thus, acting sooner rather than later is essential for commercial property owners seeking tax relief.
Taking Advantage of Tax Assessment Reductions
For investors who acquired commercial real estate during the pandemic’s low-interest-rate period, now is the time to reassess property tax valuations. By leveraging changes in interest rates, inflation, and market conditions, property owners can potentially reduce their tax burden. Partnering with knowledgeable local appraisers and legal advisors can increase the chances of a successful appeal. Don’t miss this window of opportunity—acting now could result in substantial savings on property taxes before market conditions shift further.
Seizing this opportunity not only helps manage current financial pressures but also positions property owners more favorably for future market changes. The chance to contest assessments based on inflated valuations is closing, so it's crucial to act quickly to capitalize on this strategic tax-saving approach.
Comentarios