Why CRE property tax assessments often miss the mark

A burgeoning divide between assessed values and market values

The commercial real estate (CRE) landscape is ever shifting and, as a result, property tax assessments are often disconnected from current market realities. While assessors rely on standardized methods to value properties, their assessments are frequently based on outdated data or flawed assumptions that fail to account for market nuances, leaving many CRE owners facing tax bills that do not align with their property's true market value. This discrepancy is particularly challenging in regions where the gap between assessed value and market conditions can become cavernous.

When tax burdens become falsely inflated, CRE owners contend with diminished profitability, and in scenarios where competition is high or properties are facing economic volatility, additional tax-related costs can strain cash flow to a devastating degree. Even if a property is assessed at less that market value, it may still be over-assessed relative to its performance in the market, or relative to similar properties, putting it at a competitive disadvantage for attracting tenants.

Moreover, growing disparities between assessed and market values often create inconsistencies within a property class, where certain properties shoulder more of the tax burden while those with undervalued assessments pay disproportionately less tax.

How do assessors determine CRE property values?

To determine the value of a property, assessors rely on three methods: cost, income, and sales comparisons, which are employed on a “mass appraisal” basis. When using a cost approach, which is typically leveraged for special-purpose properties, single-tenant properties, and personal property, costs are typically derived from internal or 3rd party manuals and depreciation tables. When using the income approach, which is typically leveraged for multi-tenanted properties, the assessment authority collects information from property owners within a respective category each year and uses this data to determine standard or typical rents, as well as allowances for vacancy/expense and capitalization rates for groups of properties. For the sales comparison approach, statistical modeling is often used to analyze values of a large sample of highly similar properties, such as subdivision homes or vacant land.

Although these valuation methods remain consistent, how they are applied, the date of the valuation, the revaluation cycle, and the opportunities (and process) for challenging assessed values vary on a regional basis across North America. Some jurisdictions, such as Texas, British Columbia, and Alberta, reassess property values each year. Other jurisdictions, such as Tennessee, Illinois, Quebec, and Ontario, reassess only every few years, while some states and territories have no mandated revaluation cycle.

Common discrepancies between assessed values and actual market values in commercial real estate

Assessments may diverge from market values due to a number of factors – a valuation date set in the past, mass appraisal based on limited data, or flaws in the assessor’s methodology.

The valuation date for assessments is set by state, provincial, or local legislation. This date is most commonly January 1 of the taxation year, but it can be a year or several years in the past. Consequently, assessors must rely on data that is outdated by several months or even years.

Since the date of valuation is determined by state, provincial, or local legislation, assessors will often reference data that is outdated by months or even years. Assessors generally rely on “mass appraisal” techniques using limited data to determine standardized market rates. For example, assessors must rely on property owners to submit income and expense data and often do not collect or disregard non-standard lease deals. They also often lack access to all sales transactions and may disregard sales that do not fit their assumptions (i.e. outlier transactions that are lower than expected and therefore labeled “distress” sales, or non-market transactions). As you can imagine, these factors can skew the standards derived from this data and, subsequently, skew the assessed values of CRE properties.

Assessors may also value reproduction cost (the cost to require a new item that is a duplicate of the item in place), rather than replacement cost (the cost of a reasonable and available substitute), which overstates values determined when using the cost approach. Assessors often incorporate only age-based depreciation in their values, and the recent high rates of inflation have distorted those calculations.

Looking at the office sector downturn through the lens of property tax assessments

It's no secret that in recent years, the office sector has experienced significant losses in values, as vacancy rates hit historic highs. While asking office rents in most areas remained relatively stable, owners were compelled to offer substantially increased inducements, improvements, or rent-free periods to attract/maintain tenancy. As a result, net effective rents were much lower; at the same time, high interest rates slowed transaction volume and put upward pressure on interest rates. Since there were few transactions to rely on and asking rents did not change, many assessment regions (even those with annual revaluation), ignored this loss in value. As a result, taxes for office buildings were higher as a percentage of sales than any other sector.

Conversely, the values of warehousing and distribution properties experienced robust growth in values after the pandemic, which has slowed with rising interest rates and inflation. If a region has not been reassessed since the pandemic, the next revaluation is likely to result in massive increases for these properties. Even in regions that reassess annually, assessments may rise to meet market values at a time when values are starting to fall. This recently happened in Dallas, where the rise in industrial values post-pandemic was not captured in assessments until 2024, resulting in an unexpected 40-50% assessment increase when transactions had slowed and values were declining.

Preparing for a successful property tax appeal

To identify an appeal opportunity, CRE owners need to obtain and verify the data used to set the assessed value. Does the assessment reflect the property's physical characteristics and performance as of the valuation date? Is the property’s performance in line with the market? Is there any obsolescence that has not been identified? If the assessment is close to market value, are assessments of similar properties lower than market value? Comparing assessments to sale prices is one indication of overassessment, as an assessment that is higher than comparable properties may be cause for appeal. If the window to appeal is short, CRE owners may need to file the appeal first and identify the issues later.

Altus Group’s 2024 US Real Property Tax Benchmark report identifies potential overassessments based on the relationship between taxes and sale prices, and provides median tax rates per square foot for benchmark properties in each sector of each city. It’s important to note, however, that even if assessments are lower than current sales prices, you may still be paying too much property tax.

Ultimately, data is the key to a strong appeal – the more data that you have to support your position, the better your chances of success. A property tax appeal is the only time CRE owners want to highlight and document their property’s issues and shortcomings. With this in mind, rental data should identify vacancies, gross or other atypical lease deals, and any tenant inducements or costs of landlord work associated with new deals. Any property inefficiencies should be documented, with a clear explanation of how those inefficiencies impact productivity. The assessor may support their value with “market” data or 3rd party data, and to make the case for an appeal, CRE owners will need to show why the assessor’s data is not fully reflective of the market, or why your property does not align with that data.

Inaccurate property tax assessments will cost you

Ultimately, relying on assessors to adjust valuations is a risky strategy, as assessors are not incentivized to proactively lower assessments. In fact, many tax assessments fail to account for declining property performance, rising vacancy rates, or unique lease deals that could dramatically affect a property's true value. For CRE owners, the solution is clear: taking proactive steps to challenge or appeal property tax assessments.

For a property owner operating in multiple tax jurisdictions, being proactive can be challenging. Notices of assessment arrive in each jurisdiction at different times, with a deadline to appeal that may be 30 days or less. Property tax appeals may take months or even years to resolve – and getting the city to issue a refund makes the process take even longer. As a result, keeping track of your assessments, tax liabilities, appeal deadlines, and pending refunds can be an administrative nightmare.

Fortunately, property tax software plays an integral role in maximizing the return on investment in property tax management. With the help of technology, CRE owners can automate document processing to eliminate data entry errors and costs, while digitized assessment data can help to identify appeal opportunities and ensure that appeal notices and documents are filed before the deadline. The right property tax platform will also assist in automating bill payments to avoid penalties, tracking the status of appeals, and identifying pending refunds. If the assessment change will impact future taxes, reductions can be seamlessly integrated in budgets.

Enlisting the help of a property tax expert ensures CRE owners are prepare their appeal data and tell the story in a way that includes enhanced data and analysis that is not available to the assessors and takes into account assessment practices and case law in the local jurisdiction. Armed with reports, market insights, and the guidance of property tax consultants, owners can not only identify discrepancies but also build a compelling case for meaningfully reducing their tax burden.

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