Is a recession on the way in 2019? If you ask a CFO, there is nearly a coin-flip chance that the answer is yes. Ask a CFO if a recession will start by the end of 2020 and that number skyrockets to 82%, according to the latest Duke University/CFO Global Business Outlook survey.
One thing is certain, there will be another economic downturn at some point in the future and it will most likely impact commercial property. According to the Green Street Commercial Property Index (CPPI), commercial real estate lost nearly 40% of its value during the last financial crisis. After bottoming out in May of 2009, it took nearly six years for commercial real estate prices to return to their pre-crisis levels. Machinery and equipment also saw exponential declines in value due to the impact of the recession on manufacturing.
Recessions – for all the problems they create - can create unintended opportunities for tax savings. When the property values of real estate, machinery, and equipment declines, it follows that the amount you are taxed for those properties should also decrease. This, however, is not the case as the assessment process itself is not an agile one. With all the market speculation on an impending recession, now is a good time to start evaluating your commercial property tax management strategy. Here are three things to consider:1. Your Assessment Will Not Decline Right Away
The first thing to consider is timing. While a recession will most likely impact the value of your commercial property, it can take years for the market to reflect the impact. Because property tax is based on fair market value, defined as the price at which a buyer will pay and a seller will accept as payment for an asset, it will take time for the market to reflect the necessary evidence to support a lower valuation. During this phase, it’s important to keep an eye on commercial valuations in your markets both geographically and within your industry.2. Factor this Lag into Your Budget Process
A declining commercial property real estate market does not mean that the assessment of your property will automatically reflect the actual loss in value due to market changes. In fact, due to declining government revenues during a recession, assessors may be hesitant to lower property values at all. This means that during a recession, there are more instances of properties being over assessed and taxed more than they should. It is critical to take this consideration into your budgeting process to ensure sufficient cash flow to meet your tax obligations.3. Start Planning Now
Because of the desynchronization recessions create between market values and assessed values, there are opportunities for savings if a company starts to focus on cost reduction strategies now. By incorporating commercial property taxes into your overall financial strategic planning, you can track a property’s value year-to-year and be able to quickly challenge when an assessment is too high. It equally important to track the property tax calendar dates for each jurisdiction, so you’re timely in any appeals and have the documents required to appeal each assessment.
Commercial property tax is always a variable and unpredictable cost. Layer on top of that the fact that the process has limited transparency and you have the burden of proof when it comes to proving fair market value, and it quickly becomes apparent that it is a financial risk that needs to be proactively managed. This is especially true during a recession when property values decline.
Contact us to learn more about the strategies we used to mitigate risk for our clients during the last economic downturn and start forming a strategic plan today for the next one.