Why CRE property tax assessments often miss the mark

Common discrepancies between assessed values and actual market values in commercial real estate

Assessments may diverge from market values due to a number of factors – a valuation date set in the past, mass appraisal based on limited data, or flaws in the assessor’s methodology.

The valuation date for assessments is set by state, provincial, or local legislation. This date is most commonly January 1 of the taxation year, but it can be a year or several years in the past. Consequently, assessors must rely on data that is outdated by several months or even years.

Since the date of valuation is determined by state, provincial, or local legislation, assessors will often reference data that is outdated by months or even years. Assessors generally rely on “mass appraisal” techniques using limited data to determine standardized market rates. For example, assessors must rely on property owners to submit income and expense data and often do not collect or disregard non-standard lease deals. They also often lack access to all sales transactions and may disregard sales that do not fit their assumptions (i.e. outlier transactions that are lower than expected and therefore labeled “distress” sales, or non-market transactions). As you can imagine, these factors can skew the standards derived from this data and, subsequently, skew the assessed values of CRE properties.

Assessors may also value reproduction cost (the cost to require a new item that is a duplicate of the item in place), rather than replacement cost (the cost of a reasonable and available substitute), which overstates values determined when using the cost approach. Assessors often incorporate only age-based depreciation in their values, and the recent high rates of inflation have distorted those calculations.

Income properties that are struggling to maintain occupancy and offer tenant inducements, improvements, free rent, or percentage rent-in-lieu will often find that assessors’ values reflect full market rents and do not capture rents they perceive to be below market, or the cost of achieving those rents. Vacancy rates that are higher than the market standard may not be accounted for. Additionally, value inherent in the business or its intangible assets (such as reputation, skilled workforce, and brand recognition) may be included, overstating the value of the “bricks and mortar” real estate. ‘Standarized values’ means there is a trend toward the center, the best-performing properties are often undervalued, while the worst performing are overvalued.

Looking at the office sector downturn through the lens of property tax assessments

It's no secret that in recent years, the office sector has experienced significant losses in values, as vacancy rates hit historic highs. While asking office rents in most areas remained relatively stable, owners were compelled to offer substantially increased inducements, improvements, or rent-free periods to attract/maintain tenancy. As a result, net effective rents were much lower; at the same time, high interest rates slowed transaction volume and put upward pressure on interest rates. Since there were few transactions to rely on and asking rents did not change, many assessment regions (even those with annual revaluation), ignored this loss in value. As a result, taxes for office buildings were higher as a percentage of sales than any other sector.

Conversely, the values of warehousing and distribution properties experienced robust growth in values after the pandemic, which has slowed with rising interest rates and inflation. If a region has not been reassessed since the pandemic, the next revaluation is likely to result in massive increases for these properties. Even in regions that reassess annually, assessments may rise to meet market values at a time when values are starting to fall. This recently happened in Dallas, where the rise in industrial values post-pandemic was not captured in assessments until 2024, resulting in an unexpected 40-50% assessment increase when transactions had slowed and values were declining.

Preparing for a successful property tax appeal

To identify an appeal opportunity, CRE owners need to obtain and verify the data used to set the assessed value. Does the assessment reflect the property's physical characteristics and performance as of the valuation date? Is the property’s performance in line with the market? Is there any obsolescence that has not been identified? If the assessment is close to market value, are assessments of similar properties lower than market value? Comparing assessments to sale prices is one indication of overassessment, as an assessment that is higher than comparable properties may be cause for appeal. If the window to appeal is short, CRE owners may need to file the appeal first and identify the issues later.

Altus Group’s 2024 US Real Property Tax Benchmark report identifies potential overassessments based on the relationship between taxes and sale prices and provides median tax rates per square foot for benchmark properties in each sector of each city. It’s important to note, however, that even if assessments are lower than current sales prices, you may still be paying too much property tax.

Data is the key to a strong appeal – the more data that you have to support your position, the better your chances of success. A property tax appeal is the only time CRE owners want to highlight and document their property’s issues and shortcomings. With this in mind, rental data should identify vacancies, gross or other atypical lease deals, and any tenant inducements or costs of landlord work associated with new deals. Any property inefficiencies should be documented, with a clear explanation of how those inefficiencies impact productivity. The assessor may support their value with “market” data or 3rd party data, and to make the case for an appeal, CRE owners will need to show why the assessor’s data is not fully reflective of the market, or why your property does not align with that data.

Inaccurate property tax assessments will cost you

Ultimately, relying on assessors to adjust valuations is a risky strategy, as assessors are not incentivized to proactively lower assessments. In fact, many tax assessments fail to account for declining property performance, rising vacancy rates, or unique lease deals that could dramatically affect a property's true value. For CRE owners, the solution is clear: taking proactive steps to challenge or appeal property tax assessments.

For a property owner operating in multiple tax jurisdictions, being proactive can be challenging. Notices of assessment arrive in each jurisdiction at different times, with a deadline to appeal that may be 30 days or less. Property tax appeals may take months or even years to resolve – and getting the city to issue a refund makes the process take even longer. As a result, keeping track of your assessments, tax liabilities, appeal deadlines, and pending refunds can be an administrative nightmare.

Fortunately, property tax software can play an integral role in maximizing the return on investment in property tax management. With the help of technology, CRE owners can automate document processing to eliminate data entry errors and costs, while digitized assessment data can help to identify appeal opportunities and ensure that appeal notices and documents are filed before the deadline. The right property tax platform will also assist in automating bill payments to avoid penalties, tracking the status of appeals, and identifying pending refunds. If the assessment change will impact future taxes, reductions can be seamlessly integrated in budgets.

Enlisting the help of a property tax expert ensures CRE owners are prepare their appeal data and tell the story in a way that includes enhanced data and analysis that is not available to the assessors and takes into account assessment practices and case law in the local jurisdiction. Armed with reports, market insights, and the guidance of property tax consultants, owners can not only identify discrepancies but also build a compelling case for meaningfully reducing their tax burden.

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