CREJ - Property Management Quarterly - July 2016
All you have to do is look at the cranes dotting the skyline from Boulder to the Denver Tech Center to see that Denver has a thriving real estate market. Real estate transactions are plentiful and prices have reached record highs in the last few years. Office space vacancy rates have stabilized, rental rates have increased and capitalization rates have stabilized. All of which are necessary for a thriving real estate market. With all of the positives in the real estate market, there are downsides to owners and building tenants – property taxes have risen. Property taxes are a function of market value and the mill levy. In Colorado, all properties are reappraised every two years on Jan. 1 of the odd year. Since the Great Recession, starting in 2013, average property values have increased. The largest increase was in 2015 when assessors had more transactions to review than they’d had in the past to set market values for the 2015 reappraisal. Additionally, sale prices pointed to increased property values. The mill levy is the second factor in determining property taxes. The mill levy is made up of city and county services such as the general fund, bond repayment, social services, police and fire, and capital maintenance. These services make up a little less than half of the mill levy and the school districts make up the remainder of the levy. Some properties are located in special districts that have additional mills for operations, bond interest and repayment. Legislative Tax Policies There are several legislative tax policies that impact the mill levy. First is the Taxpayer Bill of Rights, also known as the TABOR amendment, that says state and local governments cannot raise tax rates without voter approval and cannot spend revenues collected under existing tax rates if revenues grow faster than the rate of population growth and inflation, without voter approval. Revenues in excess of TABOR limits are refunded to taxpayers unless taxpayers vote to allow governments to keep the surplus. Through 2012, 85 percent of Colorado’s local jurisdictions had received voter approval to remove some or all of the revenue limits set by TABOR. Second is Tax Measure 2A, passed in the city and county of Denver in 2012. The measure permanently removed TABOR restrictions on the city’s tax base and eliminated four credited mills with 2.22 credited mills still in place. It implemented an antispiking provision that prohibits the elimination of the remaining 2.22 mills if assessed property value and local growth exceeds 6 percent. Third is the Gallagher Amendment, which divides the state’s property tax burden between residential and commercial. Forty-five percent of the total state property tax collected comes from residential property taxes and 55 percent comes from commercial property taxes. The assessment ratio for commercial property is 29 percent and the ratio for residential property is 7.96 percent. The residential ratio floats while the commercial ratio is static. The effective tax rate is the product of the mill levy and the assessment ratio. The effect of a thriving real estate market and legislative tax policies is higher taxes per square foot. Denver’s central business district and Lower Downtown have the highest taxable values per sf but the lowest tax rates. The net effect is some of the highest property taxes per sf in the metro area. LoDo property taxes are especially high due to many properties being located in the Platte River Valley Metro District. The Denver Tech Center and Meridian office parks have the lowest property taxes per sf. Interlocken office properties have high taxes per sf due to high levies. The takeaway is that savvy investors and office tenants need to pay close attention to property tax liabilities when buying and renting office space. Tenants are wise to negotiate expense caps when signing new leases. Property values continue to rise while decreases in property tax rates have been minimal due to voter approval to remove some or all of the revenue limits set by TABOR. It’s crucial to understand the effect of property taxes and the impact they have on your total occupancy cost.