By: Noah Bronkesh, Esq. and Ted Zangari, Esq.
The recent economic tsunami has already devastated the commercial real estate sector. But another wave of bad news is about to hit owners of commercial real estate. The economic downturn has drastically reduced state tax revenues, and state officials are responding by significantly cutting state aid to municipalities and school districts. Why is this bad for property owners? Because local governments will be unable to compensate for the cuts in state aid simply by making commensurate cuts in expenses (many of which are fixed costs such as debt service and binding labor agreements) – they will be forced to increase local property taxes to make up for budgetary shortfalls.
Real estate taxes are often overlooked by building owners in their search for budget items that can be reduced in order to soften the blow of vacancies or to lower operating costs as they attempt to attract new tenants and retain existing ones. Tenants, who typically reimburse their landlords for a share of real estate taxes, overlook this potential area for savings even more frequently – by failing to compel their landlords (through enforcement of lease provisions or simple persuasion) to consider a tax appeal. Yet, a review of the local tax assessment process may well reveal that an owner and, in turn, its tenants are paying more than their fair share of the municipal budget. This is especially true in the current depressed real estate market because many municipalities last conducted a revaluation or reassessment in the real estate boom of the last decade, and, as a result, the current assessment of many commercial properties is based on bloated values of yesteryear that no longer reflect market value.
Not only could a successful tax appeal mean tax savings for 2008, it could also mean a smaller tax obligation in future years.