Paid Rent – Not Lease Rates – Reveal Taxable Value

Mark Maher

Many states assess commercial property on a fee-simple basis, using market rents and vacancy rates to calculate a property’s potential income and value. That may work in a stable market, where multi-tenant properties have rent rolls that continually turn over and are consistent with market rents.

 Few U.S. markets are stable these days, however. In today’s economic tumult, a property’s leased fee position—its value based on contract lease rates—may not reflect current, dire market conditions that can bring down its taxable value. It’s more important than ever to educate the assessor to the realities of leasing in 2010.

In many cases, the data in the rent roll don’t convey the full story of a property’s performance. Tenants may be missing payments or be late in meeting their obligations. Some spaces might be rented but physically vacant as companies close sites and consolidate operations. This “shadow space” that is leased but unoccupied reduces the appeal of the rest of the property to potential new users. Worse yet, shadow space is often available for sublease and directly competes with the landlord for tenants, usually at attractively low rates.

Another common source of overvaluation by assessors is published asking rental rates, which many jurisdictions equate to market rates. Such information is easily available and busy assessors often revert to it as a starting point for valuing properties.

The property owner’s leasing team is the best source of information to establish the new, lower market rents that will produce an assessment in line with true value. The taxpayer can build a case by providing examples of tenants signing leases for low rent, but that task may prove challenging because few tenants are currently taking new space.

As an alternative, property owners can marshal anecdotes of failed leasing efforts in order to counter asking-rent data. Lost and dead leasing deals need to be detailed so that assessors can place themselves in the property owner’s shoes.

Remember that few assessors have experienced a precipitous downturn before. It’s in the taxpayer’s best interest to educate assessors on the realities of leasing in a down market.

Mark Maher is a partner in the Minneapolis-based law firm of Smith Gendler Shiell Sheff Ford & Maher, the Minnesota member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at