RE103C17: Property Assessments, Valuation, & Taxation in Commercial Real Estate

Approved March 17, 2017

Property Taxes

1. Purpose of Property Taxes
   1. Tax Levy-city/town total assessed property value
   2. Bond revenue supports capital projects
   3. Budget –suggested by municipal executive branch & approved by municipal legislative branch. Tax levy is procedurally reviewed by Mass. Revenue Department
   4. Taxes pay the bills in town and/or may be used to fund new projects, capital improvements, etc.
   5. Special work in town may require a special assessment to pay
   6. Taxes provide funding for road maintenance, snowplowing, deicing, fire and police services, etc. that service commercial properties.
   7. City or Town has a bond rating that allows them to raise funds by selling bonds on Wall Street at a fixed interest rate. The stronger the town, the better the bond rating and the less interest needs to be offered.
   8. Promptness of property tax payments and running a tight budget or prompt paying budget is critical to every municipality
   9. Some cities, towns and counties still may not have adequate taxes to pay for old or existing bills and can file for bankruptcy. Cite examples.
2. Types of Property Taxes
   1. Property taxes (primarily), special fees, meals & hotel tax, personal property taxes
   2. The taxes can be invoiced quarterly or semi-annual depending on the town. Quarterly helps with cash flow and the need to borrow money and incur interest payments
   3. The invoicing method would be relevant to commercial tenants in understanding when the landlord would be invoicing them. Estimated monthly tax collections by landlords is an option.
   4. Nonprofit Exemptions-hospitals, religious organizations, educational institutions, & Governments –
   5. Payment in Lieu of Taxes (PILOT) agreement between municipal government and nonprofit entity based on certain criteria: education institutions, hospitals, others that are located in commercial buildings or properties.
   6. Discuss the advantages and disadvantages of the PILOT program
   7. Small business & residences-limited exemptions –community options (government decision)
   8. Community Preservation Tax-supports recreation, affordable housing, & historical preservation –local options range from 1 -3 percent - can be cancelled 5 years after implementation - 
   9. Personal Property Tax- Business Furnishings, Public Utilities, household furnishings (non-primary residences) -professional tools & intangible property exempted – audits used. Some commercial landlords have on-site equipment and vehicles used to service a commercial property. Could have an on-site management and/or facilities office that is taxed. Taxes might be in the commercial lease as a “pass-through”
   10. An office building with a reception foyer, wall paintings, sculptures, furniture can all be assessed and taxed as personal property
   11. A commercial tenant’s (furniture, fixtures and equipment) FFE can be taxed as personal property
   12. Excise (tax) vehicles – varies per valuation –work with RMV
   13. Commercial trucks and vehicles will be taxed to a commercial business such as owner-occupied properties
   14. Investors will purchase commercial tax liens at a discount and resell or take possession of the commercial building
3. Tax Incremental Financing
   1. TIF is an agreement between municipality and business that would place a commercial facility in a town with property taxes increasing from a low amount to a realistic level on a long term basis
   2. Tax Incremental Financing –used by industrial users with town that can bring employment to town or to a new state
   3. Town has to grant the TIF. Assessments may start at 0 and rise to full assessment over a 10 year period.
   4. Some TIFs may have gradual tax invoices over a 10 year starting at 0 and then increasing 10% per year until full taxation in year 10. The TIF program has been a way to attract new businesses to a town to generate economic growth.
4. Tax Rate Setting
   1. A tax shift has been moving from residential to commercial/industrial properties. These taxes are passed through to the tenants and can make one town more expensive to operate a business vs. another town. Can place a commercial building at a disadvantage in certain towns.
   2. Prop 2 ½ -limits tax increase to 2 ½% increase plus new growth-adjusted by override (increase)or debt exclusion (capital project –limited term), or underride (decrease)-voters decide Tax Rate Setting – it tends to be higher for commercial than residential.
   3. Some towns have 1 rate for residential properties and 1 rate for commercial. Some towns have 1 rate for both properties. Some towns have 3 rates for residential, commercial and industrial.
5. Methodology
   1. Cadastral Map terms-metes & bounds, lots & blocks, latitude & longitude
   2. Geographic Information Systems-Computer Assisted Drafting –involves data conversion & maintenance
   3. Depreciation-obsolescence vs. deterioration, curable vs. incurable, direct vs. indirect method, economic age life
   4. Capitalization Formulas for Income Properties –Income /Capitalization Rate = Valuation –capitalization rate determination (risk factors plus taxes)
   5. Info Sources –Laws Relating to Municipal Finance & Taxation (Massachusetts Revenue Department)
   6. Property Assessment Valuation International Association of Assessing Officers)
   7. Mass Appraisal-computerized formulas with adjustments for differing specifications for commercial properties
   8. Assessments are good for 2 years, but some towns are assessing every year
   9. Discuss difference between “assessed value” and “market value”. Discussion on Ad Valorem Taxes
6. Commercial Lease Impact
   1. How does tenant improvements, ADA, capital improvements affect the building assessment?
   2. How is the increase in building assessment and taxes impact the commercial tenant?
   3. Commercial tenants might negotiate real estate tax clause in a lease so that any increase due to TI work conducted by adjoining tenant, is not passed through to them
   4. Should a tenant negotiate that a landlord be required to file for periodic abatements; discuss related costs and benefit to the tenant of an abatement.
7. Board of Assessors: Tax Appeal
   1. Board of Assessors-appointed or elected, determine value via formulas, approve or deny exemption & abatement requests, & defend values at Appellate Tax Board
   2. Agricultural, forestry, & agricultural properties –discounted valuations (MA)
   3. Full Cash Value applied- market, cost, and income approaches –application varies with property types & conditions
   4. Unique Properties-historical, famous, stigma, & technology (e.g. solar)-special attention –valuation adjustments
   5. Commercial owners can appeal tax assessments 
   6. Why are abatements denied?
   7. Can assessments be challenged in the preliminary stages?
   8. How much lee-way does an assessor have in adjusting the valuation?
   9. Is hazmat a consideration for a lower assessment?
   10. Discuss how the commercial owner appeals to the state Mass Appellate Tax Board

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