Your tax bill should reflect the risks of today's real estate market
The risk associated with buying and maintaining a particular piece of real estate is a significant factor when it comes to justifying a reduction in property taxes. The ability to obtain financing, the credit worthiness of tenants, as well as unpredictable occurrences, like was seen with Hurricane Sandy, causes even the most prudently planned real estate investments to carry some amount of inherent risk.
Risk factors are being scrutinized closer than ever before as credit creation has slowed following the recent economic crisis. Not only are banks requiring more collateral before lending, they are also carefully examining each property in light of the economic downturn. Thus, simply having a willing buyer and a willing seller does not always mean a deal will be made. Buyers must fit an increasingly stringent profile in order to qualify for financing. While we are seeing tentative signs of an uptick in bank lending, the ability for all but the most credit worthy borrowers to obtain financing on attractive terms remains constrained.
These risks can significantly impact both a property owner's net operating income and the price they can receive for a property, creating uncertainty and volatility in the owner's all-important capitalization rate. Whether you've recently purchased your property or have owned it for years, these risks still apply to your valuation when it comes to your property tax case.
When negotiating your property's assessment, an estimate of fair market value is made. In order to maximize your reduction and reduce your tax burden as much as possible, supporting a high capitalization rate becomes a critical item.
In a booming economy, real estate values increase incrementally each year, buyers are plentiful, and credit is freely available. But the past five years have shown that certain sectors are more prone to the market's volatility than others. While real estate has historically been a cyclical industry, the amplitude of the most recent cycle has certainly been greater than most market participants have previously seen. While the last few years have been a rollercoaster of ups and downs for owners, they have also provided important data for analysts and appraisers from which to base capitalization rates. The changes in these rates can potentially prove very favorable for an owner's property tax case.
Lending practices have raised capitalization rates for all properties, but each property type has its own unique factors to consider. Hotels have seen occupancy rates and revenue per room decline as both family and business trips have decreased. Marinas, laboring under a difficult economy as well, are now also dealing with costly repairs in response to Hurricane Sandy. Even after they have successfully recovered, the prospect of another Sandy-like event will dissuade many buyers and keep insurance premiums elevated.
Other sectors have seen a bifurcation in risk based on the quality of their property. Class A office buildings have seen capitalization rates stay low, but Class B capitalization rates continue to increase. The same is true of power centers and neighborhood centers with institutional grade tenants trading at low capitalization rates, whereas strip centers with only one anchor tenant are not seen to be as stable investments in certain areas.
Emphasizing a property's risk is not how owners typically like to characterize their investments, but this is precisely the approach your tax attorney should take. Producing evidence of increased capitalization rates, both in the form of broad data sets as well as localized information unique to your property, can serve to reduce your property's value for assessment purposes.
As a result of the Federal Reserve's zero interest rate policy, yields on all manner of investments have fallen dramatically. An investor now receives less than 2% yield when buying a 10-year U.S. Treasury bond and a saver receives a small fraction of a percent on their savings account deposits. Real estate, where yields are measured in capitalization rates, is no exception. However, the illiquidity and uncertainty of investing in real estate create risks that are orders of magnitude greater than those "risk free" investments. You take on significant risk by investing in real estate, and should be rewarded for that in the form of an assessment and a tax bill that properly reflect those risks.
Brad Cronin, Esq. and Sean Cronin, Esq., are partners and attorneys at Cronin & Cronin Law Firm PLLC, Mineola, N.Y.
Story ran in the Long Island section on 03/12/2013