Why commercial property owners need to look at real estate taxes

Commercial property owners face many challenges as they try to balance operational expenses and rental income to achieve a desired return. The focus for many owners is on generating leasing activity and planning for capital improvements and routine building expenses. One key expense category that is often misunderstood or considered too late is real estate taxes.

Taxes are typically viewed as a necessary evil that can be ignored until ownership has to pay the bill. What many owners overlook is the potential for significant tax savings that can help offset operating expenses and, ultimately, improve the bottom line.

This is one category that should be moved to the forefront, as the potential for savings, through reductions that bring the property in line with fair market value, can be considerable.

There are many reasons why a property's assessed value might be too high, from changes in vacancy to missed opportunities for appeals from previous owners.

By reviewing the assessment on a regular basis - each year and before a sale, for example - ownership can ensure they are not missing opportunities for appeals.

One of the biggest misperceptions owners have is that tax appeals are only available every three years. While the three-year cycle is applicable in many cases, property owners have the ability to appeal taxes each year if certain criteria are met.

For example, if a building has a significant drop in occupancy or has structural damage or other changes that would affect its value, those factors can be part of an appeal any year, so long as it is filed by the deadline. The point being that ownership should never assume that an appeal is warranted without first discussing it with their tax advisors.

The appeals process is similar across the various commercial real estate sectors, although there are nuances to evaluating certain buildings. Some retail properties, for example, may have more volatility in their tenant mix and should be reviewed more regularly to assess market value.

Buildings of any type that were recently purchased should be reviewed to determine if anything was missed in previous appeals.

Reviewing the assessment each year is also good budgeting. By meeting with tax and legal advisors early on in the process, owners can get a realistic view of the tax picture, including whether an appeal is warranted.

As investors and business owners approach buying a building, they should review the assessment and consider whether it accurately reflects the market value.

They should also consider what calculations were used in estimating market value.

It is important to have these discussions before the closing, to avoid paying a prorated share of a tax bill that might not accurately reflect market conditions. For example, if you are considering purchasing a vacant building be sure to determine whether the tax bill is based on vacancy relief obtained by the prior owner.

Vacancy relief is a one-year reduction and likely to be removed when the building is sold. As a result, the prior owner's tax bill would grossly understate what the new owner will pay in the first year of ownership. While no one likes to pay taxes, it is important to approach the process with as much lead time and attention as one would apply to other building expense categories. Real estate taxes can account for more than 50 percent of a building's expenses, making it a category that should not be overlooked.

• Kevin B. Hynes is a partner with O'Keefe Lyons & Hynes.