Mounting cost pressures are pushing marketplaces owners to value-engineer expenses. One big-ticket item at which they’re taking aim: property tax assessments. Property owners across the country are seeing a spike in expenses, and it’s not welcome news. Landlord pricing power is eroding in the wake of higher common area maintenance costs and property taxes.

Property taxes represent a significant cost for both tenants and owners, and owners are taking a more proactive approach to appealing tax assessments and lowering tax bills. “There has been a surge in appeals because of the pandemic,” said Fahim Sayed, vice president of real estate tax and senior associate general counsel for Brookfield Properties’ retail portfolio. Although the pandemic impacted a variety of property types, retail property foot traffic and sales were hurt by property closures, limited operating hours and restrictions on the number of people allowed in stores. “All of these factors affected the financial performance of properties across the country and necessitated appeals to ensure that assessors were aware of this situation,” said Sayed.

Property tax appeals can save a property anywhere from a few thousand dollars to over a million. Kimco Realty vice president of real estate tax and insurance Paul Dooley said: “We’re really working on behalf of the property and the tenant, although it also helps us as a landlord on the leasing side to have less taxes imposed.”

Large malls and shopping centers in particular face sizable tax bills that can run into the millions of dollars annually. For example, the assessed value of the Mall of America in Bloomington, Minnesota, is $693 million for the 2022 tax year, which puts the county property tax bill at nearly $23 million. Although the 2023 tax rate has not been finalized, the proposed assessed value for next year increased to $751 million, according to Hennepin County tax records. 

Backlog of Appeals

A common trigger for a property tax appeal is a change in circumstance that impacts income, such as the loss of a key anchor tenant, a drop in sales or a decline in occupancy. “If a property has significant vacancy, you obviously want to react to that,” noted Dooley. “However, the best approach is to examine your assessment each year in light of market conditions and income to make sure the assessment is fair and equitable under the law of that state.”

Many owners jumped out early in filing property tax appeals after lockdowns started in March 2020. Another spike in appeals followed for 2021 tax assessments. Initially, owners filed appeals because they were anticipating a value reduction based on what they thought was happening in the market due to bankruptcies or disruption, noted Newmark Valuation & Advisory senior vice president Peter Helland. “Moving to 2022, appeals really went through the roof because there was no doubt that the market had changed,” he said.

Tax authorities in many jurisdictions across the country still are working through a backlog of appeals. Helland recently attended a court hearing for a 2019 tax appeal. Some jurisdictions are consolidating appeals and grouping years together to get through the backlog more quickly, he noted. “That is helping with the backlog a little bit,” he said.

Some of the best advice for an owner to achieve a successful appeal is to be patient and persistent, added Dooley. “I think part of the system is designed to frustrate you. It can be a long and cumbersome process.”

Documenting Financial Challenges

The process for filing property tax appeals varies from state to state. Most states give property owners the right to appeal their market value assessment every year, although jurisdictions have different rules on the timing for appeals and what time period an appeal will cover. Georgia, for example, has periodic reassessments, so an owner can’t appeal every year, noted Dooley. “The key for the taxpayer is to be cognizant of the laws in their states and procedure to file an appeal in that state,” he said.

The burden of proof in making a case for a lower value lies squarely on the taxpayer. Owners need to provide income and expense statements to help an assessor understand what’s going on in the market and at a particular property. “Regardless of the economy, the taxpayer should always be aware of what the tax assessor is doing. Even in a robust economy, you want to make sure they’re not overdoing it,” said Dooley.

It’s important for an owner to tell the story of a property and to document the economic challenges it’s facing. That includes documenting center operating metrics, such as changes to income, rents, sales per square foot, accounts receivable and occupancy. “When you have high property taxes, it can have a downstream effect on our tenants and thus … customers,” said Sayed. “It affects the communities’ ability to thrive within our centers, so long-term, it is very important to get the taxes under control and to document the economic challenges that are impacting a property.”

Savings Add Up

Some jurisdictions have good informal mechanisms for taxpayers to voice their concerns about assessments, in which case an owner might be able to resolve an appeal relatively quickly. Texas, Michigan and Maryland, for example, all have informal routes that make it possible to resolve appeals quickly, noted Sayed. Then there are those jurisdictions in which it can take years and multiple efforts to get valuations reduced. “We have had a lot of success in pursuing the informal appeals, and that is really predicated on reaching out early in the process,” he said.

Owners can benefit from putting a dedicated system for reviewing assessments in place, as well as from engaging with assessors before assessments are even released. Taking those steps can reduce the number of formal appeals an owner may need to file and can limit the number of appeals to be pursued in litigation.

There is no “magic number” that determines whether an owner should or shouldn’t file an appeal. Even a 5% reduction on the value of a large property could be quite impactful. Some jurisdictions keep assessments in place for multiple years. North Carolina, for example, works on a five-year cycle. As such, reaching out in the first year to reset the value could result in significant financial benefits across that five-year period.

Increasingly, property tax appeal filings have shifted from reactive tools to proactive ones. “The pandemic has served as a catalyst for property owners to review their portfolios for appeal opportunities more frequently than they have in the past,” said Sayed. Previously, a large assessment would trigger an owner to file an appeal. Now, the trend is to be more diligent in reviewing assessments annually or even more frequently as financial circumstances change, he added.