Colorado Real Estate Journal - August 5, 2020
Since its 1982 enactment into the Colorado State Constitution, the Gallagher Amendment has served as the balance for which residential and nonresidential property taxes are distributed. At its core, the amendment stipulates that residential assessments can comprise no more than 45% of the state property tax base, while nonresidential (commercial, industrial, vacant and agricultural land, natural resources and state-assessed property) make up the remaining 55%. Further, under the amendment, nonresidential assessments remain fixed at 29% of market value, while the residential rate “floats” so that the 45% and 55% split is upheld. In other words, the residential assessment rate is the lever by which the Gallagher equation is held in balance. However, Colorado lawmakers increasingly are crying “foul” as the intended balance is placing a disproportionate burden on businesses, overly stressing municipal budgets and forcing officials to make deep cuts to already challenged local community resources. How did we get there? Let’s take a moment to explain. When initially implemented, the residential assessment rate began at 21%. This has since plummeted to the current 7.15% rate, due primarily to the significant growth and subsequent residential value boom across metropolitan Denver. As a result, the marked decline in the residential assessment rate has resulted in roughly $35 billion in tax relief to Colorado homeowners since 1983. While the average Front Range homeowner may be unaware of these tax benefits due to the recent meteoritic rise of Front Range home values, it is the rural areas of Colorado where, much to the homeowner’s delight, the effects of the Gallagher Amendment have been most pronounced. According to Michael Van Donselaar, director of property tax at Duff and Phelps, rural areas of Colorado depend heavily on activities such as natural resource extraction, and, unlike the Front Range where values have spiked since the recession, the same has not held true in such rural parts of the state. Furthermore, sustained business activity across the Front Range has hedged against residential property tax cuts; however, for more rural areas that have experienced far less growth, the combination of stagnant residential values and declining residential assessment rates (which are uniform statewide regardless of one’s location) has resulted in a significant reduction to tax revenue at the local level. Now 38 years after becoming law, the Colorado Legislature is once again attempting to repeal Gallagher (a repeal effort in 2003 failed by a large margin). However, following the recent approval from both the House and the Senate, the November ballot will be the first opportunity for Colorado residents to have their final say on the issue. If a repeal is successful, Keith Erffmeyer, the Denver County assessor, said that the specific tax landscape post repeal remains speculative. According to Erffmeyer, what is known is that a repeal of the Gallagher Amendment would effectively freeze assessment rates at 7.15% (residential) and 29% (commercial) due to a companion bill, Senate Bill 223, that accompanied the recent approval. Future legislation could alter these rates; however, the Tax Payer Bill of Rights would prevent any increases in the assessment rates without a subsequent vote from Colorado residents. Conversely, should Colorado residents vote down the repeal, Erffmeyer echoed the fear espoused by the bipartisan legislature currently promoting the repeal efforts; namely, the residential rate could continue to decline as a result of sustained home value increases, while the COVID-19 pandemic places historic downward pressure on nonresidential (commercial) values. The result? The state’s property tax administrator estimates a residential rate decline from 7.15% to 5.88%, which would render a $491 million cut for school districts statewide and a $204 million cut for county governments. All this in a time where businesses are failing, and government coffers are reeling. To date, the 5.88% estimate for the residential rate is just that, an estimate. However, since residential and nonresidential property types are reassessed in odd-numbered years, the waning effects of COVID-19 on the real estate assessment landscape could make the 2021 reassessment that much more challenging, whether or not the Gallagher Amendment repeal survives. It is important to note that 2021 assessed values will be based on an effective date of June 30, smack at the tail-end of the COVID-19 pandemic. Those familiar with the current commercial real estate market are aware that COVID-19 has stalled many commercial real estate transactions, as the gap between buyer and seller expectations of value widens. The result has been a dearth of sales data leading up to the June 30 date of value. While many professionals within commercial real estate valuation acknowledge a decline across commercial values during the pandemic, obtaining substantive sales data to prove this assertion creates quite a conundrum for assessors in the upcoming reassessment cycle. Unfortunately, once the COVID-19 pandemic subsides and normal market activity resumes, sales that occur beyond the effective date of value and assumedly point toward a general decline across commercial values (some property types presumably faring better than others), could trigger a record number of appeals from building owners come spring of 2021 when the assessed values are released, notes Erffmeyer. He revealed that several plans are being considered to combat the potential issue, though none are concrete enough to report at this time. While there are many arguments for and against the prior effectiveness and future appropriateness of the Gallagher Amendment, there’s little debate that the current pandemic is putting local municipalities in a tough spot. Without question, the efficacy of the Colorado Legislator’s repeal efforts will impact Colorado’s commercial real estate landscape for years to come and, while several different outcomes are possible, the sustained burden that Gallagher continues to place on local government and community resources should make a caution case for the voting public to at least consider the repeal.