BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limitedby guar antee, and forms part of the international BDO network of independent member firms.
PANDEMIC EFFECT ON PROPERTY TAXES
February 9, 2021
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DOROTHY RADICEVICHTax Partner, National Property Tax Leader
DANIEL FADDENSALT Senior
Manager
JOE CARRTax Partner
ROSS FORMANManaging Director,
Corporate Real Estate Advisory
With You Today
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Agendafor Today
Property Tax Overview
Property Tax Function Goals, Communication, Opportunities & Considerations
Commercial Real Estate Industry – COVID-19 Impact
Commercial Real Estate Market Trends, Valuations & Predictions
Q&A & Closing Remarks
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Question 1
Do you have confidence the country will reopen in 2021, returning to a more pre-COVID style business and social atmosphere?a. Yesb. No
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Property Tax Overview
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What is Property Tax?
AD VALOREM – “ACCORDING TO VALUE”
A tax imposed by local government as primary source of income for local government services such as parks, fire protection, police, schools, public works and public health
Ad valorem tax is based on the principle that the amount of tax paid should depend on the value of property owned
Valuation of property is as of the lien date (generally Jan. 1 of year)
76% Property Tax
5% Miscellaneous
2% Interest
5% Charges for Service
>1% Other Minor Sources
2% Intergovernmental Sources
2% State Motor Fuel Tax
5% State Replacement Tax
4% Other States Sources
TOWNSHIPSSAMPLE REVENUE BY SOURCE
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Significance of Property Taxes
TOTAL STATE & LOCAL BUSINESS TAXES FY2019
From COST study “Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2019
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38% Property Taxes
21% General Sales Taxes
9% Corporate Income Tax
4% Unemployment Insurance
6% Excise Taxes
7% Individual Income Tax
5% Business and Corporate License
3% Public Utility Taxes
3% Insurance Premium Taxes
2% Severance Taxes
2% Other Business Taxes
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Taxable Property REAL AND PERSONAL
All 50 states allow local jurisdictions to tax real property situated within the jurisdiction. Thirty-eight states tax personal property and approximately 11 of the 38 states tax inventory.
STATES THAT EXEMPT PERSONAL PROPERTY:Delaware, Hawaii, Illinois, Iowa, Minnesota, New Hampshire, New Jersey, New York, North Dakota, Ohio, South Dakota, Pennsylvania
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Taxable Property
PERSONAL PROPERTY
Land and property directly attached to land: Buildings Fences Landscapes Driveways Mineral Deposits
Property that can be moved/removed without compromising building structure – defined as assets that are not real property: Vehicles Furniture & Fixtures Inventory Machinery & Equipment Supplies Work-in-Process
REAL PROPERTY VS
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Property Tax Cycle
SEPTEMBER - DECEMBERTax Bills Issued
JANUARY - MAYPersonal Property Tax Return Filings
MAY - SEPTEMBERAssessment Appeals
APRIL - JULYReal & Personal Property Assessments Issued
JANUARY 1Assessment Date
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State Assessment (Lien) Date Return Deadline Inventory
AK 1/1 Varies VariesAL 10/1 12/31 ExemptAR 1/1 5/31 TaxableAZ 1/1 4/1 ExemptCA 1/1 5/7 ExemptCO 1/1 4/15 ExemptCT 10/1 11/1 ExemptDC 1/1 7/31 ExemptDE Exempt Exempt N/AFL 1/1 4/1 ExemptGA 1/1 4/1 TaxableHI Exempt Exempt N/AIA Exempt Exempt N/AID 1/1 3/15 ExemptIL Exempt Exempt N/AIN 1/1 5/15 ExemptKS 1/1 3/15 ExemptKY 1/1 5/15 TaxableLA 1/1 Varies TaxableMA 1/1 3/1 VariesMD 1/1 4/15 ExemptME 4/1 4/30 ExemptMI 1/1 2/20 ExemptMN Exempt Exempt N/AMO 1/1 3/1 ExemptMS 1/1 4/1 Taxable
State Assessment (Lien) Date Return Deadline Inventory
MT 1/1 3/1 ExemptNC 1/1 1/31 ExemptND Exempt Exempt N/ANE 1/1 5/1 ExemptNH Exempt Exempt N/ANJ Exempt Exempt ANM 1/1 2/28 ExemptNV 7/1 7/31 ExemptNY Exempt Exempt N/AOH Exempt Exempt N/AOK 1/1 3/15 TaxableOR 1/1 3/15 ExemptPA Exempt Exempt N/ARI 1/1 1/31 ExemptSC 1/1 Varies ExemptSD Exempt Exempt N/ATN 1/1 3/1 VariesTX 1/1 4/15 TaxableUT 1/1 Varies ExemptVA 1/1 Varies VariesVT 4/1 4/20 VariesWA 1/1 4/30 ExemptWI 1/1 3/1 ExemptWV 7/1 9/1 TaxableWY 1/1 3/1 Exempt
PERSONAL PROPERTY TAX:
Lien Dates & Return Deadlines
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Property Tax Function Goals, Communication, Opportunities & Considerations
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Which property tax function resonates the most with you?a. Managing administrative burdenb. Mitigating risk and exposurec. Reducing property tax liability
Question 2
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Ideal Goals of Property Tax Function
Manage administrative burden of compliance and tax payments
Mitigate risk and exposure
Reduce property tax liability
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Communication
Staying apprised of major changes within the company is essential to maintaining an effective property tax function. Something as simple as changing a capitalization policy threshold can have ripple effects in reporting of assets and can result in under/over reporting of assets.
Making time to meet with accounting, facility managers, and management on a regular basis can help stay ahead of the curve and know where the pitfalls may lie.
Although the property tax function typically falls under the umbrella of the tax department, there are many stakeholders who can have influence in affecting property tax values. Soliciting input from finance, accounting, facility managers, and planning and development can go a long way in being prepared for major changes that might impact your properties.
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Opportunities
Ghost Asset Removal Exemptions - Pollution Control/Minimum Thresholds Reclassifications Accelerated Depreciation Obsolescence Analysis- Functional and External Freeport Inventory Maximization Real vs. Personal Classification Idle Equipment Vacancy Changes due to Pandemic Audits
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Considerations for Next Property Tax Cycle
Decreased RevenueFactors contributing
Increased ExpensesSafety requirements due to pandemic
Deferred Maintenance
Asset UtilizationIncreased or decreased
Employment changesLayoffs, furloughs
Space Utilization Vacancies due to virtual implementation, demand changes
Changes in Business Strategy Product, service, logistics, inventory
Lack of Ability to InvestIndustry freezes, liquidity, risk, tenant leases
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Jurisdictional Activity
Increased Audit Activity - third parties Aggressive audit positions - supplies, spare parts, longer lives Delayed or frozen reassessments - Philadelphia, Nassau County NY Denial of disaster relief - TX, CA No relief of exemption requirements - OK Tax Rate Increases - Nashville (34% increase), City of Chicago
(additional COLA annually) Removal of exemptions - NE $10k exemption Filing threshold - KY $1,000 or less of fair cash value Electronic Filings - Indiana Portal 2021 Backlog of appeal cases - CA Property Tax Situs - MI sourced to ordinary location for 2021
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Commercial Real Estate Industry –COVID-19 Impact
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Question 3
Were you surprised to learn that property taxes make up more than a third of total state and local business taxes nationwide?a. Yesb. No
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Goals & Learning Objectives
Understanding of commercial real estate market trends and pandemic impacts
The resulting impacts on different asset types, in different industries, in different geographies
Forward-looking consequences on asset value
“The supply and demand for office space may change significantly. A lot of people have learned that they can work at home, or that there’s other methods of conducting their business than they might have thought from what they were doing a couple of years ago. When change happens in the world, you adjust to it.”
Warren Buffett
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The COVID-19 pandemic has had an uneven impact on the commercial real estate market The impact varies across industries, geographies and asset type
Commercial Real Estate Market
TREND PRE COVID-19 COVID-19
Hotel Occupancy average 67% Occupancy level dropped to 38%
Office L.A office leasing 18M sq. ft. & vacancy rate of
18.1% National office vacancy 10.9%
L.A office leasing declined 44% & vacancy rate of 22.5%
National office vacancy 17.1%
NYC $41.3B in real estate sales $2.69B tax revenue
$21.41 in real estate sales $1.39B tax revenue
Retail 552 bankruptcies since 2012 610 bankruptcies in 2020
Industrial 211M sq. ft. net of absorption for previous 5-year annual average Expected 250M sq. ft. of net absorption in 2021
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Impact of COVID-19 on Commercial Real Estate Market
Retail sales declined from 18% in May to -0.7% in Dec.
E-Commerce hit $10.8B in sales on Cyber Monday, an increase of 200% from 2016, with a 49% decline of brick-and-mortar foot traffic for the Black Friday weekend
11,060 fashion store closures in 2020 and anticipated 20,000 -25,000 stores will be closed in 2021
Office occupancy declined 84M sq. ft. in 2020, 40M sq. ft. of losses were in Q4
National office vacancy rate is 17.1%
Office sublease space increased more than 50.7% to about 148M sq. ft.
An estimated 110,000 restaurants in America, or 17%, permanently closed in 2020
10,000 restaurants closed between Oct.-Dec. 2020
Restaurant sales were $240B less than expected
Sales slumped 21.2% year over year in Dec. 2020
Sources: CNN, Jll, Cushman Wakefield, Sourcing Journal, S&P Global, GlobeSt
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Commercial Real Estate Market Trends and Valuations
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Question 4Do you think the Chicago property tax increase tied to annual CPI will help close the projected budget deficit?a. Yesb. No
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Market Trends
U.S. market capitalization rate vary across industries: the industrial market cap rate for Q1 2021 is 6.4% compared to Q1 2020 of 7.4% and controversially the office market cap rate for Q1 2021 is 11.1% compared to Q1 2020 of 7.0%
The U.S. vacancy rate is another variable that is impacted in the commercial real estate market. The retail industry vacancy rate for Q1 2021 is estimated to be 6.18% compared to Q1 2020 of 5.25%. However, there is still a decrease with the industrial market vacancy rate for Q1 2021, which is 5.9% compared to Q1 2020 of 5.4%
The U.S. occupancy rate varies across industries. The office industry occupancy levels are 87.57% in Q1 2021 compared to 89.35% in Q1 2020. Similarly, the retail industry occupancy levels were 94.75% in Q1 2020 and estimated to be 93.81% at the end of Q1 2021
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Market Trends
MARKET
OFFICE MARKET RETAIL MARKET INDUSTRIAL MARKET
Vacancy Rate
12 Month Rent
Growth
Market Capitalization
Rate
Inventory SF
Vacancy Rate
12 Month Rent
Growth
Market Capitalization
Rate
Inventory SF
Vacancy Rate
12 Month Rent
Growth
Market Capitalization
Rate
Inventory SF
New York 10.5% -2.7%% 6.6% 951M 4.4% 0.4% 6.1% 609M 4.7% 3.3% 5.6% 832M
Boston 9.3% 0.06% 6.3% 352M 3.1% -3.1% 6.2% 241M 4.9% 4.8% 6.6% 347M
Chicago 13.4% -0.4% 7.8% 503M 6.3% -2.9% 7.4% 571M 6.3% 3.6% 7.0% 1.3B
Dallas 17.3% -0.2% 7.5% 399M 6.1% 0.9% 6.7% 440M 7.1% 4.0% 6.1% 990M
San Francisco 11.0% -8.4% 4.7% 180M 4.8% -4.5% 4.5% 81.9M 6.1% 1.5% 4.8% 94.6%
Los Angeles 12.6% -1.6% 5.8% 427M 5.4% -2.9% 5.4% 446M 3.3% 3.4% 4.6% 938M
Miami 10.8% 1.5% 6.5% 110M 4.4% 0.1% 5.7% 136M 5.2% 4.4% 5.8% 251M
Washington, D.C 14.4% -1.25 7.3% 507M 5.1% -0.2% 6.4% 264M 5.9% 3.0% 6.6% 266M
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Commercial real estate sales in Q4 2020 declined 1% for a year-over-year basis
Property values for hotels/hospitality declined 6%, retail declined 6% & office space declined 4%
Property values for apartments increased1%, industrial assets increased 2% and land increased 4%
Commercial real estate prices decreased 9% year-over-year in Q4 2020
Commercial Market Valuations
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Future Trends & Predictions
Sources: Bloomberg, USA Today, CBRE
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FUTURE TRENDS & PREDICTIONS
Industrial Industry will Flourish in 2021
Estimated net absorption of 250M sq. ft. of industrial space due to growth of e-commerce in 2021, which is more than the previous 5-year annual average of 211M sq. ft.
Vacancy rates will continue to decrease, rental rates will continue to reach record-high levels and robust development
The industrial space has been one of the most resilient commercial real estate sectors due to the increase in demand driven by e-commerce. YoY growth surged to 44.5% in Q2 2020 compared to 14.8% in Q1 2020
Occupiers will expand their locations and size of facilities to accommodate the customer reach, inventory control and supply sourcing
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FUTURE TRENDS & PREDICTIONS
Retail Industry will Continue to Grow in 2021
Retail industry will continue to grow in brick-and-mortar stores as e-commerce sales will slow in 2021
New emerging retailers and opportunists will capitalize on CRE conditions to absorb vacancies from bankrupt retailers
Class B and Class C malls will have adaptive reuse and reposition in 2021 as they were hit the hardest by COVID-19
Brick-and-mortar stores will be extremely valuable in providing customers with engagement and a physical experience for a deeper customer relationship
Absorption of the vacant retail space will be let by digital brands, medical suites, health and wellness and even automotive showrooms
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FUTURE TRENDS & PREDICTIONS
Office Industry will Stabilize in 2021
Rents will still fall as vacancies continue to rise but a gradual re-entry of employees will increase office activity
Class A office space will recover quickly with more progressive portfolio strategies to support new employee workstyles impacted by COVID-19
There will still be an accelerated pace of hiring even as occupancy declines
Suburban office markets expected to recover faster than the urban offices, especially in downtown locations
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Conclusion
The faster the global economy improves from the COVID-19 pandemic impacts, the faster the commercial real estate economy will improve
Large amounts of uncertainty will remain present in 2021 with market recovery; office space demand will remain muted while the industrial spaces will continue to surge
The future winners in the commercial real estate market will be industrial/logistics, data centers and life sciences
The industries in the middle will be office and multifamily The most challenged occupiers in the CRE market will continue to
be retail
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Question 5
Does your company conduct meetings with accounting, finance, facility, or planning and development decision-makers on a regular basis? a. Yesb. No
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Q&A & Closing Remarks
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Review your business profile over the last 12 months for factors affecting business. (Page 17)
Determine if any factors identified can be incorporated into current compliance.
Review all assessment notices prior to deadline for potential appeals.
Property Tax Call to Action
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