There has been a widespread “how dare they” reaction to certain Bexar County businesses filing lawsuits to have their properties assessed as vacant buildings — rather than revenue-generating ones — in order to reduce their tax bills.
A provision in the state tax code — commonly referred to as the “dark store loophole” — allows a business of any size to have its real estate assets qualified as vacant so that its appraised value won’t be linked to the business’s profit.
But what if lower property tax bills turned out to be an economic generator, as opposed to the escape route for businesses that it has been made out to be?
I spoke recently with local attorney Rahul Patel, the managing partner with Patel | Gaines with a client roster ranging from large hotel developers to small apartment complex landlords, who is concerned that the way certain commercial property is appraised — while generating more tax revenue today — can lead to unwanted consequences for communities in the long run.
Retailers such as Wal-Mart Stores Inc. (NYSE: WMT), Target Corp. (NYSE: TGT) and Lowe’s Companies Inc. (NYSE: LOW) have filed lawsuits across the country to reduce their annual property tax bills. In San Antonio, the city’s chief financial officer, Ben Gorzell, told Texas Public Radio that roughly $275 million in tax revenue will be lost over the next five years if big-box retailers are successful in getting a vacant classification for their real estate.
But Patel said the way such business actions have been portrayed is misleading. He said it’s unfair to categorize every lawsuit filed to lower one’s commercial property tax bill as an “attack” on a local community, which he said is the case in recent media reports. Rather, it’s often a survival method for small businesses facing massive tax bills due to their property being in transitioning areas.
Patel said such businesses often see increases in their properties’ appraisals that are not necessarily in line with their real values.
“Residential tax values have a cap, and they can only go up a certain amount,” Patel told me. “That isn’t necessarily the case for commercial real estate.”
By basing commercial property values — to a large degree — on the potential for generating profit, the resulting tax burden can be heavy for small businesses.
“There have been double-digit increases in commercial real estate values across the board, and that’s a number many of them haven’t factored in before,” Patel said. “What decisions would small, midsize and large businesses make if that’s a growing expense?”
The cycle of rising property value
For every $1 million added to a local property’s appraised value, the owner takes an immediate $27,000 hit to its capital improvements budget — or money it’s able to put back into the property. That means a landlord may have to forgo renovations, maintenance and structural upgrades, and Patel said that scenario has become more common in areas facing an increasing amount of buildings falling into disrepair, creating areas with significant blight.You can also read the full info here to know more about home renovation services.
“Nobody is able to put money back into the properties, say, around the Loop 410 and Highway 281 intersection,” Patel said. “The property tax increases are driving triple-net rental rates up, which pushes tenants out, which means landlords have no money to put back into improvements, which turns new tenants away. It has become a cycle that happens when the appraiser takes an income approach to valuing a business’ property rather than the raw value of the property itself.”
The income-based approach that the local appraisal district has taken in valuing commercial real estate properties not only has the potential to bruise land owners’ bottom lines, but it could also deter developers thinking about jumping in to San Antonio’s strengthening real estate market.
“Property tax bills are starting to become a concern for developers,” Patel said about the impact on proformas and development plans. San Antonio, so far, has managed to avoid pitfalls faced in metros such as Houston, where rents are dropping at a dramatic pace while property taxes continue to rise.
With any loophole, such as the “dark store” provision, it’s possible that a few properties will squeeze through that don’t warrant the exemption. Nevertheless, Patel asserts that the current appraisal method “cuts to the core for small and midsize businesses,” preventing them from hiring more employees, expanding their spaces or taking on risk that they otherwise would be willing to assume.
Those smaller — but just as important — economic generators should be considered when properties are appraised, Patel said. The local attorney said the city should take a business’s entire role in the local community into account, not merely its profits or the new developments sprouting up around it.
“Whether you’re ready or not, change is coming,” Patel said of the new presidential administration, imminent increases in interest rates and several pending legislative actions. “Are we equipped to find a solution for that change, or will it pummel us?”