RE103C17: Property Assessments, Valuation, & Taxation in Commercial Real Estate

Approved March 17, 2017

PROPERTY TAXES

Purpose of Property Taxes

• Tax Levy-city/town total assessed property value

• Bond revenue supports capital projects

• Budget –suggested by municipal executive branch & approved by municipal legislative branch. Tax levy is procedurally reviewed by Mass. Revenue Department

• Taxes pay the bills in town and/or may be used to fund new projects, capital improvements, etc.

• Special work in town may require a special assessment to pay

• Taxes provide funding for road maintenance, snowplowing, deicing, fire and police services, etc. that service commercial properties.

• City or Town has a bond rating that allows them to raise funds by selling bonds on Wall Street at a fixed interest rate. The stronger the town, the better the bond rating and the less interest needs to be offered.

• Promptness of property tax payments and running a tight budget or prompt paying budget is critical to every municipality

• Some cities, towns and counties still may not have adequate taxes to pay for old or existing bills and can file for bankruptcy. Cite examples.

Types of Property Taxes

• Property taxes (primarily), special fees, meals & hotel tax, personal property taxes

• The taxes can be invoiced quarterly or semi-annual depending on the town. Quarterly helps with cash flow and the need to borrow money and incur interest payments

• The invoicing method would be relevant to commercial tenants in understanding when the landlord would be invoicing them. Estimated monthly tax collections by landlords is an option.

• Nonprofit Exemptions-hospitals, religious organizations, educational institutions, & Governments –

• Payment in Lieu of Taxes (PILOT) agreement between municipal government and nonprofit entity based on certain criteria: education institutions, hospitals, others that are located in commercial buildings or properties.

• Discuss the advantages and disadvantages of the PILOT program

• Small business & residences-limited exemptions –community options (government decision)

• Community Preservation Tax-supports recreation, affordable housing, & historical preservation –local options range from 1 -3 percent - can be cancelled 5 years after implementation -  

• Personal Property Tax- Business Furnishings, Public Utilities, household furnishings (non-primary residences) -professional tools & intangible property exempted – audits used. Some commercial landlords have on-site equipment and vehicles used to service a commercial property. Could have an on-site management and/or facilities office that is taxed. Taxes might be in the commercial lease as a “pass-through”

• An office building with a reception foyer, wall paintings, sculptures, furniture can all be assessed and taxed as personal property

• A commercial tenant’s (furniture, fixtures and equipment) FFE can be taxed as personal property

• Excise (tax) vehicles – varies per valuation –work with RMV

• Commercial trucks and vehicles will be taxed to a commercial business such as owner-occupied properties

• Investors will purchase commercial tax liens at a discount and resell or take possession of the commercial building

Tax Incremental Financing

• TIF is an agreement between municipality and business that would place a commercial facility in a town with property taxes increasing from a low amount to a realistic level on a long term basis

• Tax Incremental Financing –used by industrial users with town that can bring employment to town or to a new state

• Town has to grant the TIF. Assessments may start at 0 and rise to full assessment over a 10 year period.

• Some TIFs may have gradual tax invoices over a 10 year starting at 0 and then increasing 10% per year until full taxation in year 10. The TIF program has been a way to attract new businesses to a town to generate economic growth.

Tax Rate Setting

A tax shift has been moving from residential to commercial/industrial properties. These taxes are passed through to the tenants and can make one town more expensive to operate a business vs. another town. Can place a commercial building at a disadvantage in certain towns.

• Prop 2 ½ -limits tax increase to 2 ½% increase plus new growth-adjusted by override (increase)or debt exclusion (capital project –limited term), or underride (decrease)-voters decide

Tax Rate Setting – it tends to be higher for commercial than residential.

• Some towns have 1 rate for residential properties and 1 rate for commercial. Some towns have 1 rate for both properties. Some towns have 3 rates for residential, commercial and industrial.

Methodology

• Cadastral Map terms-metes & bounds, lots & blocks, latitude & longitude

• Geographic Information Systems-Computer Assisted Drafting –involves data conversion & maintenance

• Depreciation-obsolescence vs. deterioration, curable vs. incurable, direct vs. indirect method, economic age life

• Capitalization Formulas for Income Properties –Income /Capitalization Rate = Valuation –capitalization rate determination (risk factors plus taxes)

• Info Sources –Laws Relating to Municipal Finance & Taxation (Massachusetts Revenue Department)

• Property Assessment Valuation International Association of Assessing Officers)

• Mass Appraisal-computerized formulas with adjustments for differing specifications for commercial properties

• Assessments are good for 2 years, but some towns are assessing every year

• Discuss difference between “assessed value” and “market value”. Discussion on Ad Valorem Taxes

Commercial Lease Impact

• How does tenant improvements, ADA, capital improvements affect the building assessment?

• How is the increase in building assessment and taxes impact the commercial tenant?

• Commercial tenants might negotiate real estate tax clause in a lease so that any increase due to TI work conducted by adjoining tenant, is not passed through to them

•Should a tenant negotiate that a landlord be required to file for periodic abatements; discuss related costs and benefit to the tenant of an abatement.

Board of Assessors: Tax Appeal

• Board of Assessors-appointed or elected, determine value via formulas, approve or deny exemption & abatement requests, & defend values at Appellate Tax Board

• Agricultural, forestry, & agricultural properties –discounted valuations (MA)

• Full Cash Value applied- market, cost, and income approaches –application varies with property types & conditions

• Unique Properties-historical, famous, stigma, & technology (e.g. solar)-special attention –valuation adjustments

• Commercial owners can appeal tax assessments  

• Why are abatements denied?

• Can assessments be challenged in the preliminary stages?

• How much lee-way does an assessor have in adjusting the valuation?

• Is hazmat a consideration for a lower assessment?

• Discuss how the commercial owner appeals to the state Mass Appellate Tax Board

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