How COVID has affected commercial property tax

During the first quarter of 2023, the U.S. office vacancy rate reached 20% for the first time in decades. Vacant commercial real estate impacts more than a business’s bottom line. According to The New York Times, banks and real estate analysts warn that empty offices, declining property values, and higher interest rates could lead to a budget crisis for New York and a national recession.

The trend certainly means shrinking revenues for local governments that rely on property taxes to provide critical public services. San Francisco could lose $200 million in property tax revenues by 2028. Lower office values could mean a $464 million reduction in property tax revenues over the next three fiscal years for the District of Columbia. Boston, which relies on commercial property taxes for almost 36% of total general revenues, is also likely to feel a sizable sting, according to a Tax Policy Center analyst.

All of this points to the likelihood that recovery is way off. The Atlantic declared the situation a crisis, predicting, “As more leases and loans come due, the bulk of the pain is still ahead of us. Over the next two years, many downtowns will find that dozens of buildings are no longer fit for purpose. Municipal services will likely deteriorate, and more people might leave.”

Governments aren’t the only ones hurting. For commercial landlords trying to keep tenants, the situation is also a cause for concern.

With remote work still prevalent, many companies wonder whether they should keep paying for their rented office space. Whether they decide to leave or remain has financial and tax implications for commercial property owners.

Let’s say you’re a property owner who leases office space. If your tenant were to terminate their lease or let it run out — your bread and butter would disappear. Most likely, you wouldn’t be able to lease your building again at the same rate as before because the demand for office space has diminished since COVID. 

You might think the county assessor will automatically adjust the fair market value of your property to reflect this factor when determining your property tax assessment, but that’s not always the case.

Many states only have the authority to tax the value of tangible assets. To value commercial property properly generally requires assessors to use a valuation method known as a fee simple approach. The fee simple approach considers market rents and occupancy rates to determine property values. This method estimates how much you could lease your property for in today’s economy.

A leased fee valuation method, on the other hand, looks at your current rental income and occupancy under your existing lease.

The incremental difference between these two valuations becomes an intangible asset. In many states, intangible assets aren’t taxable. Removing intangible value from the assessment lowers your annual property tax.

But what happens if the assessor uses the leased fee method instead of the fee simple method to determine your property valuation? You could have a higher property tax assessment and pay more tax.

While commercial property landlords continue to feel the impact of the pandemic on their business, Avalara provides solutions to help you only pay what you need to in order to stay compliant.

Avalara Property Tax allows you to quickly compare the fair market value of multiple properties to their assessed value and helps you decide if you should appeal your assessments. If you need someone to guide you further, Avalara Property Tax Advisory Services can provide valuation support on specific complex properties. Contact our property tax compliance specialists to learn how we can help your business.