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Page 10 — Multifamily Properties Quarterly — May 2017
Taxes
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COLORADO | TEXAS
Elan Union Station
Aloft Hotel
Park Regency Assisted Living
ONE PROJECT AT A TIME.
W hen Colorado’s Division of
Property Taxation released
its 2017-2018 Residential
Assessment Rate Study,
I knew that I wanted to
write about it. But here’s the prob-
lem: Constitutional amendments,
taxes, math … not the sexiest con-
tent, right? I was pondering how to
keep readers engaged when “Funny
How Time Slips Away” came on the
radio, and it hit me – just tie the
article to something interesting, like
Willie Nelson! Nelson wrote the song
almost 60 years ago, but the song’s
message still can be applied to today.
First, some context. What is the
Gallagher Amendment? Enacted
in 1982, it established guidelines
for determining the actual value
of property and the value used for
assessing such property. Spurred by
homeowners’ concerns over increas-
ing property taxes, it divided the
total property tax burden so that
45 percent would fall on residential
and 55 percent on nonresidential.
The solution was to fix the nonresi-
dential assessment rate at 29 per-
cent while adjusting the residential
assessment rate to maintain the
45/55 split. When residential values
outpaced nonresidential, the RAR
would decrease.
• “Well, hello there/My it’s been a
long, long time.” It’s been a long time
since the last RAR adjustment – 14
years, to be exact. In 2003, the RAR
dropped from 9.15 percent to 7.96
percent and stayed there, until now.
For 2017-2018 taxes, the RAR is
expected to drop to 7.2 percent. It
may not sound like a lot, but that’s
a 9.5 percent year-
over-year decrease.
Beginning in 1987,
Gallagher trig-
gered seven RAR
decreases in just 10
years. But in the 20
years that followed,
just two. Why? The
answer lies within
the Taxpayer Bill of
Rights.
Enacted in 1992,
TABOR prevents
state and local
governments from
raising tax rates
without voter approval. In the early
2000s, Colorado entered into a mild
recession. Total employment began
to decline, apartment vacancies
increased and home appreciation
slowed. For 2003-2004 tax years, Gal-
lagher triggered a decrease to 7.96
percent, but for the 2005-2006 tax
years, the Division of Property Taxa-
tion estimated that the RAR needed
to increase to 8.17 percent in order
maintain the 45/55 split. In general,
asking voters to self-impose addi-
tional property taxes is an unpopular
request. When people are losing their
jobs and home values start declining,
it’s a nonstarter.
While Gallagher can trigger auto-
matic decreases, TABOR effectively
prevents any rate increases. After
2005, the property tax burden that
fell on home and apartment own-
ers dropped below the required 45
percent, a trend that continued into
the Great Recession. RAR estimates
peaked at 9.13 percent in 2013, but
nothing could be done to increase
the rate from 7.96 percent.
• “How am I doin’?/Oh, I guess that
I’m doin’ fine.” Indeed, practically any
investment in a Colorado home or
apartment over the last few years
should be doin’ just fine. Across the
state, home values have increased
nearly 60 percent since 2012 while
the average price per unit for apart-
ments has almost doubled. In 1982,
residential properties made up 45
percent of Colorado’s total property
value; today, that number is closer
to 80 percent. It’s no wonder that
the RAR has declined from 21 to
7.2 percent. According to assessors,
total residential value increased by
20.8 percent between 2015 and 2017,
while nonresidential value increased
by only 13.1 percent. Absent any
change in mill levy, the new 7.2 per-
cent RAR means that if your house
or apartment increased 20.8 percent
in value, your property taxes are only
increasing by 9.27 percent.
Nobody likes to see his tax pay-
ments increase, but it’s an easier
pill to swallow when it means your
investment is increasing at the same
rate. When the value of your invest-
ment increases at twice the rate of
your tax bill, you won’t hear any
complaints. For apartment own-
ers, real estate taxes can make up
10 to 20 percent of total operating
expense, so the reduced RAR has a
material impact on net operating
income. For the most recent acqui-
sitions, it’s an even bigger windfall
– the 9.5 percent decrease in taxes
over a 10-year hold period ads up to
a full year’s worth of property taxes.
• “Never know when I’ll be back in
town/But remember what I tell you/
In time, you’re gonna pay.” Gallagher
has caused problems for local dis-
tricts that rely heavily on residen-
tial property tax revenue. Before
TABOR, districts could float the mill
rate to make up for assessment rate
decreases. Since 1992, the combina-
tion of TABOR and Gallagher has
resulted in declining tax revenue. In
2000, after nearly a decade of budget
cuts to school districts, Amendment
23 was passed requiring annual man-
datory increases to school funding.
Well, when Gallagher and TABOR
limit the ability to increase revenue,
and Amendment 23 mandates
increased funding, you have a prob-
lem. It’s shifted the burden of school
funding from local property taxes to
the State General Fund, which now
provides more than 60 percent of
school funding, whereas it used to be
less than 40 percent.
The 2017 Colorado Business Eco-
nomic Outlook estimates the value
of residential construction in Colo-
rado this year to be $9.68 billion and
estimates nonresidential to be $5.40
billion. Meanwhile, existing homes
along the Front Range are continuing
to experience double-digit appre-
ciation. It’s easy to imagine a future
where total residential value contin-
ues to outpace nonresidential value,
causing further RAR decreases and
making statewide funding problems
worse. The math doesn’t work, and
sooner or later, someone is going
to have to pay. Until then, keep in
mind, “It’s surprising how time slips
away.”▲
Travis Hodge
Associate,
Rocky Mountain
Multifamily, JLL
Capital Markets,
Denver