How to Leverage the Impact of COVID-19 and the Recession to Deliver Property Tax Savings

As the spread of COVID-19 intensifies and the U.S. finds itself at the end of a bull market, there are widespread concerns over the impact these events will have on the global economy and U.S. businesses.

Nowhere is this being felt more than in hospitality, travel, and retail – the first of many industries impacted by COVID-19 and the new recession.

World-renowned conferences and events are being canceled or postponed, negatively affecting business operations and revenues. The immediate impact is plummeting hotel occupancy and travel bans imposed by some of the largest nations seeking to contain and stymie the spread of the novel virus.

The spread of COVID-19 has even played a significant role in the stock market dropping to the lowest it has been since the 1987 recession, fanning the fears of a prolonged economic fallout that will be hard to recover from. But where do commercial property taxes fit into this complex global narrative?

Making the Connection

The connection between COVID-19, the new recession, and commercial property taxes may not be clear upon first glance. But it is there. It has to do with leveraging external obsolescence to deliver property tax savings, which can provide much needed relief in today’s uncertain times.

The key is to use external obsolescence to reflect the true fair market value (FMV) of the property as required by state laws. State laws mandate taxing authorities to use the FMV of a property as the accepted and defined method of valuation of a property’s tax assessment.

Yet the problem is that many jurisdictions lack the proper resources to fully implement the three approaches to property valuation and all three forms of depreciation to derive the FMV of a property. There’s also the challenge of new FMV definitions introduced by taxing authorities, and in some cases, accepted by the courts, that creates confusion at every level.

The question now becomes, what can disrupted industries and businesses directly affected by COVID-19, and now the recession, do with this knowledge?

In a recent webinar with CFO.com, we shed a light on various cases of external obsolescence, our approach, and the additional loss in FMV as a result of disruptors outside of the physical boundaries of the property that negatively impact the value of the business. 

These external factors, such as shifts in consumer behavior, the use of new technology, experiences in operational loss, and fluctuations in supply and demand, manifest in the form of declining production and consumption. And they are key to proving the impact of economic obsolescence.

See the connection? COVID-19 highlights all too clearly the key metrics required to identify and apply the external obsolescence adjustment to assessments. This novel virus has caused an economic impact that results in a decline in the FMV of your commercial real estate properties as well as machinery, equipment, and other assets.  

Alleviating the Impact of COVID-19 and Economic Recession by Appealing Property Taxes

Because local and state taxing authorities don’t have access to the data required to determine external obsolescence, they cannot figure out the loss in value to apply to FMV. Taxpayers can track these metrics as part of their everyday business to quantify the daily impact of COVID-19. This creates the opportunity to appeal their property taxes in the upcoming year based on operational and revenue losses.

While measures are in place to try to slow the spread of this novel virus, no one knows how long it will take for the world economy to recover from the impact, much less the looming financial recession. Sitting and waiting for things to “get better” is not the right response. In property tax, the taxpayer has to do the heavy lifting because they have the burden of proof on their shoulders.

Appealing property taxes calls for an accurate FMV valuation of the commercial real estate and the corporate entity’s business personal property which encompasses:

• Machinery
• Equipment
• Furniture
• Fixtures
• Inventory

The only problem is that the FMV of any asset, real estate, or business personal property is not found in a company’s books as they report under GAAP accounting rules, which track historical costs, not current FMV. With the burden of proof on taxpayers based on FMVs that companies cannot track, it makes this endeavor almost insurmountable, yet this is the only way to get relief from your property tax burden for as long as it exists. 

While you are putting out all of the other fires resulting from COVID-19 and an economic recession, engage with a property tax expert who has a track record of delivering significant additional tax savings for both real estate and business personal property assessments. An additional 15% - 25% reduction in value after physical depreciation can have a substantial impact on your final bill.