Fluctuations in real estate values is expected. However, when compounded with uncertain economic conditions like a recession, these fluctuations have a larger impact on a business’ bottom line — especially as it relates to fair market value and personal property assets, the basis of property tax.
While an economic downturn is usually a negative event, there are opportunities that arise for a company that takes proactive steps to prepare for an appeal. And, considering that 82% of CFOs believe that a recession will start by the end of 2020, this budgeting season is an ideal time to start preparing.
How to Spot an Opportunity During an Economic Downturn
In the last financial crisis, the commercial real estate market lost approximately 40% of its value according to the Green Street Commercial Property Index (CPPI). It took almost six years for commercial real estate prices to return to their pre-crisis levels after 2009.
So how do organizations work around a potential crisis like this? It starts with a property tax management plan. On average, companies who have a property tax management plan pay less on their tax bills when compared to their less prepared counterparts.
Without a property tax management plan in place, companies may find themselves paying tax bills that are higher than they should be. Most companies tend to classify property taxes as fixed costs and forecast a tax amount based on a percentage adjustment to last year’s bill. But there’s a problem with that methodology:
By law, property tax assessments must be based on an asset’s fair market value, and fair market value is not found in a company’s financial statements.
To create a meaningful property tax management plan, it must have accurate accruals and reliable cash flow estimates. Property owners need to know everything about their properties including current fair market values and how their property tax assessment is determined for the plan to be effective.
Creating Your Property Tax Management Plan During Budgeting Season
- State law requires assessments to be based on fair market value. Since your company financials track the amortized historical cost of each asset, you do not have enough information in-house to determine accurate fair market value. This makes it difficult to accurately project your annual liability.
- Tax ratios are set by law and they can vary based on the property type. Make sure you know which tax ratios apply to your properties.
- The trends in millage rates and revaluation cycles in local jurisdictions.
- An analysis of property assessments for new construction or acquisitions.
Tracking any of these components for even one jurisdiction can be complicated and time-consuming and is even more complex for those with a multi-state commercial portfolio. For these situations, it’s best to rely on outside help to accurately forecast property tax liability for the upcoming year. As a best practice, create a dashboard of your entire portfolio to facilitate a strategic, long-term property tax management plan.
Laying the Groundwork for a Successful Commercial Property Tax Strategy
To mitigate risk in a challenging economic environment, it's important to have a commercial property tax management plan as a key component of your global corporate financial strategy. Taking a proactive approach and knowing fair market value of all your commercial property (including equipment, machinery and other taxable property) before the tax assessment arrives is your best bet to unlocking tax savings.
Other important factors to consider when budgeting include:
- Estimate the FMV of your properties using comparable sales
- Identifying market trends
- Creating best estimates of annual tax liabilities
- Keeping an eye open to appeal opportunities for tax savings
It’s easy for CFOs and VPs of Tax to look for other cost-cutting opportunities outside of property taxes during a recession because they have access to the numbers. However, commercial property tax is one of the most important taxes that should be incorporated into a comprehensive risk management strategy. It may be a complex issue that requires outside expertise but the effort is well worth the savings you get at the end of the day.
To be best prepared for budgeting for commercial property taxes ahead of a potential economic downturn, download our e-Book to use as a guide.