CREJ - Office Properties Quarterly - April 2015
Every year in Colorado there is the opportunity to protest a property’s assigned value as determined by the county assessor, potentially saving money by minimizing your Colorado property tax liabilities and enabling a fair and just ad valorem valuation. Property owners and managers are sensitive to rising expenses, and managers often audit energy and maintenance costs looking for ways to operate their buildings more efficiently. Property taxes are the single-largest fixed-expense item. However, many overlook a possible expense reduction that requires no change to current business operations. An inappropriate valuation for ad valorem purposes cuts into the net operating income and the property value. While management styles vary, all property owners and managers are wise to implement a strategy for protecting against paying more than their fair share of property taxes. Experienced property managers are keenly aware of the occupancy costs when negotiating rents with potential tenants. An accurate ad valorem valuation is essential in remaining competitive in today’s marketplace. This strategy applies not only to office buildings but also to all real estate investments. By lowering the taxable value of a $10 million commercial building by 10 percent, in an area with a mill levy of 100 mills, the property taxes can be lowered by $29,000 annually. With any tax reduction, net operating income is increased, thus enhancing the value of the property. As Colorado assessors reappraise all real property every two years, a reduction to the taxable value in one year often will capture that tax saving in the following year (also known as the intervening year). Ideally, the valuation for ad valorem purposes should be monitored every year for unfairly assessed values. Possible grounds for an appeal include general overvaluation by the county assessor or improper classification of a property. Other circumstances that may impact value include chronic underperformance, occurring situations of excess vacancy, high maintenance costs associated with aging and dated buildings, or erroneous application of market factors by the assessor. Assessor valuation errors also can occur during times of property transition, such as during development and new construction, at the end of economic life of an improvement or at the time of redevelopment. On occasion, an event causing significant damage to the property will impact value. While many property owners attempt to appeal ad valorem valuations themselves, most quickly learn they do not have the time or expertise to navigate the complex ad valorem valuation rules and statutes, often leaving valuable tax dollars on the table. Ad valorem laws and valuation rules are ever-changing and differ from an appraisal for other purposes. Many owners of office buildings do not understand the difference between their valuation for ad valorem purposes and a “fee” appraisal. Appraisals can be done for many purposes, such as asset management, estate purposes and, most often, used in lending decisions. Appraisals can provide an opinion of value for various types of ownership interests and typically will reflect the value at the time of the appraisal. By law, ad valorem valuation in Colorado must be retroactive to a specific date in the past, using a specifically defined data collection period and can only value the fee simple estate. Further, due to the enormity of the task of valuing thousands of commercial properties, most county assessors use a computer-assisted mass appraisal system to value many properties at once. This process can make it difficult to properly consider all attributes of individual properties. Professional property tax consultants are knowledgeable in ad valorem valuation as well as the many specific ad valorem distinctions that the typical property owner may not be aware of. The benefit of using a tax consultant extends beyond that of a single appeal of a property’s ad valorem valuation. A tax consultant can analyze the property and recommend which properties should be appealed as well as recommend filing abatement petitions for real property valuations for up to two years of past valuations, if no protests were previously filed for those years. Further, a property tax consultant can educate the property owner regarding the appeal process and the financial feasibility of pursuing an ad valorem valuation appeal. Although appealing an ad valorem valuation can be complex and time consuming, hiring a professional who is skilled and knowledgeable at negotiating the multiple levels of appeal will increase the opportunity for a successful appeal, and most likely increase the amount of any realized tax savings. Most property tax consultants offer a variety of fee options. Some consultants offer the ability to negotiate a contingency fee based upon the tax savings. In many cases, if an appeal does not result in a tax savings, there is no cost to the property owner. It is important to seek a professional tax consultant with strong local market knowledge and a longstanding exemplary reputation (especially with the local assessors) to advocate on behalf of the property owner. By Colorado statute, the current year ad valorem property values can be appealed during the month of May. Be prepared to file an appeal in a timely manner. Now is the time to consider how your property tax liability affects your bottom line, and what you can do to lessen your burden. Engaging a property tax protest specialist is the best way to ensure your assigned values are fair and accurate.