Over the past five years, the retail market has divided itself into the “haves and the have-nots.” With the ICSC Texas conference just around the corner, many attendees will hear more about retail trends such as this. Although almost everyone suffered through the economic downturn, a few properties have recovered better than others. The common theme amongst them: good location.
According to our research, the assessed value of all retail properties in Dallas County decreased by approximately 1.5 percent in 2012. Nonetheless, the retail growth that has occurred has been driven mostly by new restaurants. Aside from providing good food and a great ambiance, restaurateurs are well aware that location is just as important if not more so. As such, empty spaces in prime locations are highly sought after whereas subprime locations barely get a sniff. This imbalance of supply and demand causes pricing to materially increase for those fortunate assets located in good locations.
If you are one of the “haves”, you are in an enviable position. Either your property is already generating substantial rents or it is in a position of power with many retailers courting the location. In either scenario, the value of the property is quite high and the local appraisal districts have probably taken notice. Thus, your revenue streams likely have been partially offset by an increase in property taxes. As an owner of such assets, there are a couple of things to keep in mind.
First, if the property is not fully occupied, your financial projections will have large stair step increases in revenues as you anticipate new tenants. Appraisal districts are well aware of new occupants especially if any permits are taken out to complete the finish out. Accordingly, they will increase the assessed value. Therefore, it is prudent to increase the property taxes proportionally to the increase in revenue rather than a blanket 2 percent that many use as normal inflation. However, there are ways to curb these increases.
The second thing to keep in mind is that there may be opportunity to reduce the assessed value above and beyond what an owner may expect. For example, investors may believe the stabilized market occupancy to be 95 percent for a particular area, but the appraisal district may have a lower stabilized occupancy. Aside from occupancy, there often are discrepancies of factors between what owners believe to be true and what the appraisal districts are willing to accept. Factors include but are not limited to stabilized occupancy, expense ratios, cap rates and capital reserve requirements. Professional tax agents can help identify these discrepancies and limit your tax exposure moving forward.
If you are one of the “have-nots”, then managing your expenses is vital with property taxes likely being the highest line item. The local appraisal districts are unlikely to lower the value themselves. Owners need to demonstrate to them why the value is lower, and there are a few recommendations on how to accomplish that:
First, the value of the property may be assessed by what is considered “market level” for the area. However, there may be circumstances that are specific to a property that cause it to be below market level. For example, the property could have limited parking or access. The property may be situated where visibility is low or the signage is poor. As such, the market rents for the area may be $25/ft., but the property can only reasonably achieve $20/ft. Any way it can be proven that the subject property is unique from the rest of the area will help justify a lower value.
Second, the types of tenants a property has are important. Owners are fully aware that a property that has nationally recognized credit worthy tenants is worth more. As an example, if you have two free standing retail buildings with tenants with similar lease terms, the one with the Starbucks is worth more than the one with “Laura’s Coffee Shop.” These details often get overlooked by appraisal districts. If you are in a situation where you do have tenants, the appraisal district needs to consider the types of tenants. How likely are they to succeed in that location and if not, what is the level of assurance on the lease payments.
The most important aspect of all of this is to ensure owners are looking at every angle to mitigate their property tax exposure. At times it isn’t obvious to the appraisal districts, and owners need to demonstrate reasoning to justify a reduction. Other times, it isn’t even obvious to owners. In either situation, it is best to hire an expert to assist and achieve the best assessed values possible.