That isn't always possible. A recent scandal in New York has led to a prohibition on contact between assessors and taxpayers until after assessments have been published. And for national corporations, maintaining a relationship with local assessors is a task that almost always has to be handled at a local office or by a local consultant. "You can't just hire any old accountant," notes Carolyn Makuen, state and local tax specialist for Geller & Co., a New York-based finance, accounting, and tax outsourcing firm. "Typically, you have to hire someone who is a former assessor. Property tax is a very insular, byzantine, and specialized area."
Of course, says Barry Gosin, CEO of New York-based Newmark & Co. Real Estate Inc., property owners "have a legal right to be treated fairly. If you are overtaxed and can demonstrate it, the municipality has a legal obligation to reduce your taxes." Still, he warns, companies shouldn't mess with taxation authorities unless they have a clear case: "Sometimes you don't want to open up Pandora's box. You may open yourself up to increases, too."
Tim Reason is a senior writer at CFO.
Business Tax Balance
One protection that businesses have traditionally had against property-tax increases is that they generally affect homeowners—read: voters—as well as commercial owners. But the interests of homeowners and businesses may be diverging in the current economy. While home prices have continued to stay strong in many parts of the country, commercial values have fallen. That, in turn, may put pressure on more municipalities to institute split rates.
Last October, the California Teachers Association announced it would propose a constitutional amendment on the state's November ballot to raise the rate of business-property taxes to 1.55 percent of assessed value. California has long been famous for Proposition 13, which froze both individual- and business-property taxes at 1 percent of assessed value. Gov. Arnold Schwarzenegger opposes the initiative, says spokesman H.D. Palmer.
But Schwarzenegger also faces a quandary because the limits imposed on property taxes by Proposition 13 have long made local governments in California dependent on Sacramento for funds. By making good on his campaign promise to cut predecessor Gray Davis's hated car tax—which was used as a source of funding to local governments—the new governor eliminated the primary source of funds for local government (and voter) priorities such as policing and schools. In Massachusetts, meanwhile, where housing prices are among the highest in the country, an effort is under way to raise the allowed levy on commercial property from 175 percent to 200 percent of the residential-property levy. Without that change, residential taxpayers in Boston may shoulder as much as $100 million in taxes once paid by business.
Renters Pay Taxes, Too
Many corporations, of course, own little or no property. But just because a company rents its office space doesn't mean that property tax shouldn't be considered. In the Northeast, for example, property taxes range from 15 to 25 percent of the total rent, says Barry Gosin, CEO of Newmark & Co. Real Estate Inc., in New York.
"When they negotiate leases, CFOs should think about how the structure of the lease will affect the taxes on the building," explains Gosin. For example, the cost of major renovations or alterations made at the request of an incoming tenant is often amortized through the rent—particularly if the landlord borrowed to fund the work. But that can inadvertently increase property taxes, he warns.
"The taxing authorities assess buildings based on income stream, without consideration of [the landlord's] debt," explains Gosin. It is often better, he suggests, for a company to negotiate rent for the property "as is," and work out some form of third-party financing for the renovations. "Tenants don't want to use their capital," he notes, "but they have to balance that [against the fact that] higher rent could have an impact on their taxes."
About 65 percent of Newmark's business comes from representing large corporations in lease transactions, says Gosin. "There are many subtleties to structuring leases, and every principality is different."
Moreover, says Gosin, large corporate tenants should make sure that the lease requires the landlord to initiate a tax certiorari (or property-tax protest) proceeding at the tenant's request. "Companies should obligate the landlord to go to the mat," he says. While large corporate tenants can certainly be the backseat drivers in such proceedings, privity—ownership of the property and a direct relationship with the taxing authority—makes it easier from a logistical and legal point of view for the landlord to take the lead role.
Reader Comments» Post a comment