The first of a 4-part series by Matt Barnsley
Imagine ten years ago the town you live in has an economic boom due to the discovery of oil. Petroleum companies have struck it rich and are pouring millions of dollars into your local economy. They’re buying property, hiring thousands of workers, and jumpstarting an economic rebound for your city. To help nurture this growth, the city commits millions upon millions of dollars to infrastructure: roads need to be built, along with bridges, sewers, utility lines, wastewater plants. The population of your town increases by 20% in six months and all those new people must be accounted for.
This is great news for anyone holding real estate or rental properties. As hundreds of workers flood into the city, rentals become scarce, driving up rates and increasing property values. What was once a $700/month apartment is now going for $2200/month. Tax assessors are smart people and understand how property values are increasing. They adjust the tax assessments appropriately.
We should talk for a moment about how commercial properties, like rentals, are assessed. In every case of property valuation, the end desire to figure out how much something is worth. The only way to determine that is to understand how much someone would be willing to pay for it. That’s how assessors arrive at their values.
There are two methods for determining a value: the cost approach and the income approach. Depending on the age of the property, one method is likely more appropriate to use over another. A simple way to differentiate between the two is how they arrive at their assessment. The cost approach is used for newer properties (under 5 years old). In essence, it asks how much it would cost to build this property now. For older properties, it’s generally recommended that assessors use the income approach. Since older properties have depreciated, the closest an assessor can get to understanding what someone would pay for the property is to base it off whatever income the property can generate for an owner. The cost approach wouldn’t apply to a 20-year-old building because too many variables have changed over time.
Let’s go back to our example. Imagine you own a rental property in this hypothetical town. Before the economic boom, apartments were renting for roughly $500/month. At the height of the boom, they’re going for $1000/month. Good for you, the owner, no doubt. The assessors know that property has increased in value, so they raise their assessments of your property and you end up paying more in taxes. No sweat. The economy is doing well and you’re doing fine.
Ten years later…
The oil boom goes bust. Gas prices drop and suddenly all these people leave town because they can’t find work. Property values drop because demand is lower. The town is already on the hook for the millions in infrastructure projects it’s approved and completed. But the tax base that was supporting those developments is largely gone. Thousands of homeowners (also voters, which is key) are seeing their home values drop. So naturally, the assessors lower the home value assessments.
The city still needs money. So where does it come from? By maintaining unfair, burdensome assessments on commercial properties, of course. It makes perfect sense if you view it from the perspective of the politicians. They’d much rather have a few dozen unhappy commercial property owners than thousands of angry homeowners. It’s hurting the few to spare the many. But this is America. That’s not how we do things. We don’t sacrifice business owners, so a few politicians can keep their cushy positions. It’s un-American and illegal. Instead, the commercial property owners should be fairly assessed. It really is that simple.
Economic booms can be great for local communities. It can mean millions of dollars being reinvested into their roads, schools, hospitals, and first responders. Officials need to be careful with the checks they write, otherwise, it will end up being the few who pay for the many.
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