Another pandemic victim: Commercial property assessment

by | Jun 11, 2021 | Commercial Property Tax Appeals

There are reliable methods to determine the value of Minnesota Twins baseball players. Divide the number of hits a player has by the number of at-bats, and you find his batting average. Similar calculations can determine a hitter’s slugging percentage and a pitcher’s earned run average and much more. Analyze the numbers properly, and you’ll have a very good idea of a player’s value to the team.

Three reliable methods

There are similarly reliable methods to determine the value of commercial property: the cost approach, past income analysis and the comparable sales approach. Each approach can produce a very good idea of how much the property is worth and how much the owner will pay in commercial property tax.

In a recent opinion piece for commercial real estate publication REBusinessonline, Missouri tax attorney Jerome Wallach argues that the pandemic has “badly disturbed traditional methods of determining value.

Forging ahead

“The concept of using a property’s recent historic performance as a predictor of future performance, used universally by market participants and assessors, has been gutted by a year of the pandemic.”

Regardless, states, cities and property owners must forge ahead and try to determine value.

Cost approach

The cost approach of evaluating property is built on the assumption that the value of property should be equal to the cost of building an equivalent property from scratch.

Wallach writes that “the cost of a project is not its value, and the cost of a project that opened its doors in March 2020 is certainly not its value.” Instead, the “question is whether the market would have absorbed the improved property at its cost after the pandemic changed so many economic and market conditions.”

Past income and comparable sales

Of course, many prefer to use past income performance to determine current value. But much of the commercial real estate market had a near-death experience in 2020, with flat-lined profitability. Past income performance is today a shaky indicator of present or future value.

The comparable sales approach is similarly wobbly. Investors and owner-occupiers have seen rental incomes and monetary benefits dramatically compromised over the past year-plus. Commercial property sales have plunged in much of the country.

Wallach concludes that whatever methods assessors use, the assessments “will be subject to challenge. And once challenged, the owner/taxpayer will face the same issues as the assessor in putting forth an opinion of value.”