CLOSING ENTRY: Due diligence

Why property owners should regularly review their tax assessments

Michael Rienzi//January 30, 2023//

CLOSING ENTRY: Due diligence

Why property owners should regularly review their tax assessments

Michael Rienzi//January 30, 2023//

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Over the course of the past three years or so most segments of the real estate market experienced a tremendous amount of uncertainty. While life is back to normal for most of the population, consensus seems to be that more uncertainty lies ahead for various sectors of the real estate market. Generally speaking, there has been a slowing of activity across property classes that will continue to unfold in the coming months and directly affect property tax assessments in 2024. In the meantime, property tax attorneys are getting a clearer picture as to how the past 30-plus months will impact tax appeals in 2023 and beyond.

First and foremost, 2023 will be the first year where the equalization ratios we use to calculate market values indicated by assessments will truly see the impact of the run-up in the residential market. The result is that assessments that have remained unchanged in certain municipalities could reflect market values that are 10% to 20% higher than they were three years ago despite the fact that not all property types have seen the same appreciation in value. This is because the residential market makes up the vast majority of sales included in ratio studies and therefore is the driver of the ratios applied to all property types. Those ratios are then applied to all property types regardless of how the specific market performed. Since the changes in equalization ratios largely happen behind the scenes and are most relevant in property tax appeals, most taxpayers see their assessments remain the same and assume nothing has changed besides their tax bills inching up each year. Thus, it’s not always obvious that a tax appeal may be warranted.

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Many property owners are making significant investments in amenities to attract new tenants and keep existing tenants.

We have also seen a much larger number of municipalities conducting annual reassessments over the course of the past five to 10 years. In those municipalities, assessments themselves can be up 20% or 30% from three years ago as they have changed with the market. Although there was a time where the annual change in assessments could have resulted in a large change in property taxes from one year to the next, we have seen situations recently where relatively large changes in assessment resulted in relatively small changes in taxes. Thus, while receiving an assessment that is 10% higher than last year and 20% higher than 2021 can be alarming, that increase may not result in a comparable tax increase because tax rates can drop as the value of the overall ratable base grows. In these cases, it’s important to avoid filing appeals before having the relevant data reviewed to determine if an appeal would be worthwhile.

On the commercial side, while office buildings were mostly empty beginning in March of 2020 and well into 2021, stories of tenants walking away from their leases for large blocks of space were basically unheard of. However, once leases near expiration the likelihood of more vacant space being added is high as businesses reevaluate their need for space given that remote work is here to stay across industries. The increased vacancies that will likely follow and decreased need for space will likely put downward pressure on rents, which in some markets are already largely flat over the past decade plus.

To counter this trend, many owners are making significant investments in amenities to attract new tenants and keep existing tenants. As these upgraded spaces become available there will likely be a flight to quality. At the same time, large investments may do more to resolve vacancy issues than grow rental rates while tax assessors could use such investments to justify increases in assessments. However, if rents remain somewhat flat there may not be a corresponding increase in value to justify assessment increases. Thus, the future of the office market and their assessments remains murky.

The apartment and industrial markets have continued to be strong, but headwinds are building. Apartment owners in particular have seen collections and expenses steadily rise since March 2020. Although rents are generally at or above their pre-COVID levels, many landlords are still dealing with the aftermath of the eviction moratorium while also contending with increased expenses across the board. As municipalities have grown accustomed to attributing premiums to apartment assessments, changes in the market may require municipalities and property tax attorneys alike to reevaluate the assumptions that have become somewhat standard over the past five to 10 years.

The industrial market also remains strong despite increases in rents slowing in certain areas. With the increase in e-commerce and corresponding increase in industrial values, the market looks a lot different than it did 15 years ago but the increase in values may be slowing. As infill developments begin to pop up where vacant or underused commercial buildings once stood, more remote locations may see a reduction in rents and increase in vacancy. In the meantime, high-quality newer industrial properties near densely populated areas will continue to command premiums. As a by-product, lower quality older properties in those same areas may have a premium attached to their assessments by municipalities that may not exist in the market.

Michael Rienzi is an associate at Brach Eichler LLC in Roseland.

As the foregoing illustrates, although the residential market largely sets the equalization ratios applied to assessments for all property types, there are many more factors that affect the values and taxes for every other property type. As those factors continue to change it becomes more important for property owners to have their assessments reviewed annually by experienced property tax attorneys for the annual filing deadlines, which are April 1 or May 1 for most municipalities. There are also Burlington, Gloucester and Monmouth County municipalities that have Jan. 15 deadlines for properties whose assessments are less than $1 million. Most attorneys will complete assessment reviews free of charge and typically handle appeals on a contingency basis, so the cost to taxpayers to start the process is relatively small. By comparison, paying more than your fair share year after year can be quite costly.

Michael Rienzi is an associate at Brach Eichler LLC in Roseland. He has practiced law in the area of property tax litigation, representing New Jersey taxpayers, since 2007.

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