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Page 12 — Retail Properties Quarterly — February 2015
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2 015 could shape up to be an
especially important year for
property tax purposes for
retail and commercial prop-
erty owners. There is a strong
likelihood that retail and commercial
property owners could see significant
increases in property tax valuations
given the improving real estate values
and general economic conditions in
Colorado over the last three years.
We have seen several indicators of
an improving real estate market and
strengthening economy. For example,
according to the Colorado Secretary
of State’s Quarterly Business and Eco-
nomic Indicators, state employment,
wealth and building activity signal
sustained economic growth; employ-
ment increased 2.8 percent year over
year in second-quarter 2014 (reach-
ing a new high of 2.4 million in June
2014); and annual foreclosure filings
and sales decreased significantly in
second-quarter 2014 (24.7 percent and
41.5 percent, respectively).
County assessors redetermine
property values every two years. This
two-year period is referred to as a
reassessment cycle. Under Colorado
law, county assessors are required to
value properties based on data from
an 18-month data collection period.
County assessors will revalue proper-
ties this year using a data collection
period of Jan. 1, 2013, to July 1, 2014.
The valuations for both years of the
reassessment cycle (2015 and 2016)
will rely on the same data collec-
tion period. As such, property own-
ers should pay particular attention
to their 2015 property tax valuations
when notices of valuation are issued
in May because absent unusual cir-
cumstances, such as
new construction,
the valuations prop-
erty owners receive
in May will be used
to determine their
property taxes for
the 2015 tax year
and for 2016 as well.
County assessors
may consider the
income approach,
the market
approach or the
cost approach to
valuation for retail
and commercial properties. The fol-
lowing is a brief explanation of these
three approaches to valuation, and
the impact of the data collected for
each approach on 2015 revaluations.
The Income Approach
Using the income approach, the
assessor calculates an operating
income, expenses and vacancy;
selects a capitalization rate; and
divides the net operating income
by the capitalization rate to deter-
mine the value of a property. Market
rents increased while vacancy rates
remained relatively low during the
data collection period. According to
the CoStar Group, the average rental
rate across retail property types in
Denver increased from $13.30 per
square foot mid-year 2012 to $15.07
per sf as of first-quarter 2014, and
the average vacancy rate across retail
property types in Denver was 5.9 per-
cent as of first-quarter 2014 (up slight-
ly from an average vacancy rate of 4.9
percent mid-year 2012). In addition,
cap rates continued to trend lower
during the data
collection period.
According to CoStar,
capitalization rates
ranged from 6.96 to
7.86 percent based
on approximately
14,500 retail sales
nationwide between
October 2013 and
September 2014.
Property owners
should expect that
higher net operating
incomes and lower
capitalization rates could result in
higher 2015 valuations.
The Market Approach
Using the market approach, the
assessor determines the value of a
property by analyzing the sales prices
of comparable properties sold during
the data collection period. Gener-
ally, the market approach is the only
approach to valuation permitted for
vacant land and residential property.
For 2015 revaluations, the assessor
will be using purchase and sale trans-
actions from Jan. 1, 2013, through June
30, 2014. There was a considerable up-
trend in retail and commercial values
through 2013 and moving into 2014.
According to CoStar, the average sales
price of office buildings 15,000 sf and
larger increased from approximately
$135 per sf at the beginning of 2013,
to a high of approximately $235 per sf
in third-quarter 2013, before declining
and leveling off at prices of approxi-
mately $160 per sf, which is still
higher than prices seen during much
of the previous data collection period.
As a result of the up-trend in real
property values, the application of the
market approach may result in higher
2015 property valuations.
The Cost Approach
Using the cost approach, the asses-
sor determines the value of a property
based on the anticipated development
and construction costs of the property.
Retail deliveries, construction and
inventory grew during data collection.
According to CoStar, a total of 772,057
sf of retail space was built in Denver
between third-quarter 2013 and third-
quarter 2014. There was an additional
379,028 sf of retail space under con-
struction at the end of third-quarter
2014, and total retail inventory in the
Denver market was 190.37 million sf in
14,065 buildings and 1,507 centers as
of the end of third-quarter 2014.When
the cost approach is applied, increased
construction activity and construction
costs during the data collection period
may result in high 2015 revaluations.
Look Carefully at Your 2015 Valuation
So, what should you expect in the
year to come? By May 1, 2015, county
assessors will mail a notice of valua-
tion indicating the valuation of your
property for the 2015 tax year. Based
on the discussion above, there are
good reasons to expect that your valu-
ation will increase this year, result-
ing in higher property taxes. Given
the likelihood of increases, it will be
particularly important to carefully
consider the accuracy of your 2015
valuation and whether a tax protest is
appropriate. For the 2015 tax year, the
deadline to file a property tax protest
is June 1.s
Taxes
Nickolas J.
McGrath
Associate,
Greenberg Traurig,
Denver
Neil B. Oberfeld
Shareholder,
Greenberg Truarig,
Denver