CREJ - Multifamily Properties Quarterly - May 2017
When 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 problem: Constitutional amendments, taxes, math … not the sexiest content, 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 increasing 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 nonresidential assessment rate at 29 percent 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 triggered 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, Gallagher triggered a decrease to 7.96 percent, but for the 2005-2006 tax years, the Division of Property Taxation 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 additional 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 automatic decreases, TABOR effectively prevents any rate increases. After 2005, the property tax burden that fell on home and apartment owners 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 apartments 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 percent 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 payments 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 investment increases at twice the rate of your tax bill, you won’t hear any complaints. For apartment owners, 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 acquisitions, 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 districts that rely heavily on residential property tax revenue. Before TABOR, districts could float the mill rate to make up for assessment rate decreases. Since 1992, the combination 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 mandatory increases to school funding. Well, when Gallagher and TABOR limit the ability to increase revenue, and Amendment 23 mandates increased funding, you have a problem. 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 Economic Outlook estimates the value of residential construction in Colorado 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 appreciation. It’s easy to imagine a future where total residential value continues 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.”