Will Covid bring a flood of property tax abatement requests in NH?

Stephen Wheelock

It is expected that in late 2020 or early 2021 there will be an above-normal number of property tax abatement appeals, particularly in the commercial/industrial classification.

Commercial property owners, developers and landlords ponder dropping property values with the changing landscape of commercial real estate as bankruptcies, lack of tenant demand and the inability of some tenants to stay current with lease rent. Over the last couple of years, there has been a shift from the traditional retail shopping mall along with some big-box stores to on-line shopping and home delivery. Paradoxically, it was the growth of this very retail sector some decades ago that ushered in the demise of the central business district anchoring many cities and towns.

Property values retreated, and communities struggled with declining budgets. Over the following decades, vacant downtown locations were repurposed, emerging as a consumer traffic venue with small shops, bars and restaurants.

In March, as the coronavirus pandemic took hold, many commercial establishments closed, resulting in accelerated tenant erosion, and vacated commercial space. Some of the first and hardest-hit were patron-gathering venues, and there are predictions that up to half will not reopen.

For those that do, what will their business model look like if allowed to populate at only a fraction of their former sales area?

The first trending evidence of property tax relief comes from the largest mall developers that use a gross lease model and are responsible for property taxes. When these properties lose market value, one of their first relief remedies is property tax abatement.

An abatement request must be filed in writing with selectmen on or before March 1 after the December tax bill. It is the duty of selectmen, or a named assessor, to appraise all property at market value following state rules. They, and perhaps an advisory board, also serve as overseer and board of initial review for taxpayer grievances and abatement appeals.

If called upon to hear the first level of assessment appeal, it is not surprising that selectmen appear reluctant to adjust assessments they previously approved.

If a taxpayer is denied at this level, or just doesn’t hear back, the appeals process proceeds to the state Board of Tax and Land Appeals, or Superior Court.

In the tax abatement appeal, the taxpayer has the burden of showing good cause, by a preponderance of evidence, that the assessment was disproportionately high or unlawful.

Market value estimates are defined by the state and national assessment organizations as the standard for assessment.

The primary valuation method for all improved properties is the cost approach to value, with property sales divided between land value at highest and best use, and improvement value.

The cost approach may be reliable when applied to a newer property, but there must be well-supported land value. When reviewing sales from towns around the state, it is obvious there are very few unimproved land sales with which to employ the improvement residual method of the cost approach.

A number of assessors employ the land value residual method to their improved property sales analysis, reversing the process. In this case, careful scrutiny must be applied as to the replacement costs origination along with depreciation estimates.

Assessors also can use an income approach to value method with direct capitalization. The formulation appears disarmingly uncomplicated – net operating income divided by sales equals the capitalization rate).

The capitalization, or cap rate, is derived from available local rental and sales data of commercial/industrial property and their operating expense ratio. It reflects a purchase decision representing a snapshot in time – the rate an investor expects to receive during the first year of ownership. It is evidence of market price, and when used collectively guides the assessor to a market value estimate for a commercial property.

If there is not an adequate sample size in the market area, then relevant data from third-party published sources, or other forms of regional/national sales information, may be considered. Pitfalls abound in the use of any implicit rationale method. A sale property cap rate may be “trailing,” which represents the net operating income generated for the preceding 12-month period. Or it may be a “going in” cap rate reflecting the forecasted net operating income for the first 12 months of ownership.

These and other critical details must be ascertained by the assessor if this method is used correctly to estimate market value.

Once the market value of all assessed property in a municipality is established, the second critical piece of the property tax formula is the application of the state-approved equalization ratio.

Each municipality must measure the quality of assessment performance through sales ratio studies, which involve a comparison of assessments with recent sales in each property classification. The first test is the median ratio of assessments to sale price and should not be less than the minimum ratio of 0.90. Next test is the coefficient of dispersion (COD), best described as the average absolute error of assessments expressed as a percentage which should be less than 20 for all property classes.

Also, the price-related differential (PRD) is employed to determine whether assessment ratios tend to vary by the price of the property as opposed to being uniform. PRDs should fall in the range of 0.98 to 1.03.

An examination of a medium-sized municipality that had undergone a city-wide reassessment for 2019 was recently reviewed.

The methods and techniques used by the state to verify and ascertain sales ratio studies was applied. Looking at commercial sales over 11 months following the reassessment, it could be expected that sales occurring during that period would be assessed very closely to their sales price. Quite surprisingly, they weren’t even close.

As certified by the state in reassessment year 2019, the city-wide equalization rate, PRD, COD and median ratio across all property classes were within prescribed. Independently, the findings show key metrics actually miss their prescribed maximum deviation points by over 11%.

This finding does not imply there may be other instances of issues in assessment practices across the state. However, it does raise the issue that roiling commercial property markets with systematic downward pressure on their values, will result in successful appeals negatively impacting municipal budgets.

Stephen Wheelock is CEO of Whelok Group Property Tax Surveyors LLC, a cohort of real estate and tax consultants specializing in commercial, institutional and industrial properties. He can be reached at taxsurveyors@gmail.com.