The coronavirus and property tax abatements

Nearly a year into the coronavirus pandemic, it is clear that while the long-term impact of the virus remains uncertain, a profound societal shift has occurred.

Whether the move to remote work has made companies rethink their need for commercial office space or whether the lockdown has accelerated the shift to online shopping – leaving storefronts, malls and big-box stores with significant vacancies and requests for rent deferrals from remaining tenants – pandemic-induced changes have caused substantial adjustments in real property use – and values – in New Hampshire and across the country.

For taxpayers, particularly those in the retail, hospitality and commercial office sectors, these shifts presents both challenges and opportunities.

The ability to abate

Property taxation in New Hampshire tax is determined on an ad valorem basis, meaning that such taxes are based on a percentage of the fair market value of the property – land and buildings – subject to taxation.  Each municipality is required to regularly appraise all real property within its borders.

New Hampshire law requires that all assessments and resulting taxation be proportional. There are several nuances to this analysis – for example, it is necessary to consider all property owned by a taxpayer in the same municipality – and it is important to understand that the standard is not simply whether property is assessed at a value higher than fair market value, but whether it is assessed at a greater percentage of fair market value then the other properties in the same community.

This is usually determined by relying on the calculations (median equalization ratios) established annually by the New Hampshire Department of Revenue Administration that measure the general level of assessment in a municipality.

For example, a median equalization ratio of 95% means that, on average, all real estate in a particular municipality is assessed at 95% of its market value. Under this example, a taxpayer is entitled to an aggregate assessment that reflects 95% of its property’s fair market value.

New Hampshire’s statutory scheme allows “any person aggrieved by the assessment of a tax” to file an abatement request with the selectmen. Critically, RSA 76:16 provides a short time period to challenge the assessment following the issuance of the final assessments and year-end tax bills for a particular tax year, with requests for a given tax year filed in the following calendar year. Thus, tax year 2020 abatement requests must be filed with the selectmen or other municipal authority by March 1, 2021.

Selectmen have until July 1 to respond to the abatement request.  If they deny the request, or if they do not respond, the taxpayer has until Sept. 1 to file an appeal in either the Superior Court in the county where the property is located or with the Board of Tax and Land Appeals, an administrative body with parallel jurisdiction.

Duty to abate

In both setting the initial assessment and considering any abatement requests that flow from it, the Board of Selectmen have certain obligations.

As the New Hampshire Assessing Standards Board has recognized, selectmen and retained assessors are obligated to ensure that “[p]rocesses must be well documented, transparent, credible, accurate and fair.”

Similarly, the selectmen have independent legal and ethical obligations to ensure that assessments reflect fair market value and are proportional.

As noted in a recent BTLA decision, when a municipality discovers that property has been over-assessed based on subsequent information, subject to tests of materiality and reasonableness, the assessment must be abated. Accordingly, while the taxpayer will bear the burden of proof to show that his assessment was disproportionate, the tax abatement scheme is meant to aid, not hamper, redress.

Methods of valuation

If a taxpayer seeks to appeal a denial of an abatement request, they will have to prove – either in the Superior Court or before the BTLA – that their property is assessed at a greater percentage of the fair market value as compared to the other properties in the same community.

The determination of fair market value is generally accomplished by using any one or a combination of the various accepted appraisal techniques in valuing real property.

In brief, there are three main approaches used to determine fair market value: the income approach (or income capitalization approach); the cost approach; and the sales comparison approach.

The income approach can be used for income-generating properties, with the income expected capitalized at a given rate to determine the anticipated benefits the property may yield.

The cost approach estimates value by determining the cost required to replace or reproduce the property after depreciation.

The sales comparison approach compares the property at issue to other recent sales with adjustments in order to allow for comparisons.

The New Hampshire Supreme Court has never held a single valuation approach or specific combination of approaches as correct as a matter of law.  The appropriate valuation approach often depends on the particular category of property.

Valuation issues and Covid

One only has to glance at the front page of any newspaper to see the impact the coronavirus has had on various sectors of the economy.

Real estate investment trusts show sharp drops in returns across almost all sectors, with commercial office space, retail and hospitality topping the list.  Suffice it to say, the pandemic has led to declines in occupancy, declines in rent collection and numerous closures – both temporary and permanent.  All of these factors, in turn, impact the valuation methods used to determine fair market value.

With respect to the income approach, it will likely be necessary for appraisers to take into account a radically changed environment, where property cannot generate as much income as it could prior to the pandemic. Restaurants, even if permitted to operate, will likely still need to operate with patrons further spaced out, thereby decreasing income.  Downsizing in workforce and the need to socially distance reduces the income commercial office space property can generate. Similar restrictions cut across industries.

Under the cost approach, it is unclear how the pandemic may affect this valuation method.  If land values and construction costs decrease, the cost to replace or reproduce property may similarly decrease.  That said, the construction business has seemed to be fairly resilient to the downturn thus far.  Similarly, land values have remained strong for the time being, particularly on the residential side.

The sales approach, even under normal circumstances, operates on a lag thus it will be particularly difficult to utilize in determining the fair market value of property affected by the pandemic. In the long term, the sale of properties happening now will reflect the changes we are now seeing – the expansion of online retail at the expense of brick-and-mortar, depressed values in the hospitality sector and decreased demand for commercial office space.

All that said, taxpayers considering filing for an abatement need to pay special attention to the industry they are involved in and the property at issue. The practical implications of the shutdown and the various public health measures – what it means for this business, in this industry, for this timeframe – need to be considered, as those factors will influence the relevant appraisal methodologies relevant to the specific property necessary for a supportable valuation.

Natural disasters

New Hampshire’s statutory scheme for the abatement of taxes is codified at RSA 76. While “any person aggrieved” may file for the abatement of taxes, the statutory scheme makes a particular allowance for the proration of an assessment “whenever a taxable building is damaged due to unintended fire or natural disaster to the extent that it renders the building not able to be used for its intended use.”

While the “natural disaster” provision of the law – RSA 76:21 – has not yet been interpreted by the BTLA or the courts, a colorable argument could be made that the coronavirus pandemic amounts to such a disaster, given that the pandemic prevented multiple sectors from using building for their intended use. Indeed, under Executive Order 2020-04, subsequently amended at least seven times, Governor Sununu declared a state of emergency due to the novel coronavirus.

Enacted in 2012, the RSA 76:21’s legislative history indicates that it was enacted to remedy the “unreasonable situations in which taxpayers may be paying taxes for structures” that are not unusable. In the one Supreme Court decision interpreting the statute, involving a dwelling hit by lighting, the court observed that a taxpayer’s rights to pursue an abatement were not precluded or limited by the “natural disaster” provision. Moreover, the court described it as offering a “mandatory prorated calculation.”

Taken together, taxpayers affected by the coronavirus shutdown could consider pursuing relief not only under RSA 76:16, but also under RSA 76:21, where applicable.

This option seems particularly apt to those industries forced to partially or fully close for a period of time as a result of government orders.  Moreover, while the tax abatement scheme generally applies to disproportionate assessments, RSA 76:21 suggest that even if property is not disproportionately assessed, that an abatement may be due.  Indeed, the court noted in its Carr ruling that “illegality and irregularity are by no means the only causes for which justice requires that taxes should be abated,” and that “other misfortunes must furnish equally good cause for abatement.”

While the long-term impact of the novel coronavirus on real property use and values remains unknowable, the fact remains that filing an abatement may be a viable option for taxpayers who have suffered a disproportionate assessment, particularly in the face of the pandemic.

Attorneys Margaret H. Nelson, Derek D. Lick and Trevor J. Brown practice in the State Taxation Group of Sulloway & Hollis, Concord. They can be reached at mnelson@sulloway.com, dlick@sulloway.comor tbrown@sulloway.com.