Reducing Property Taxes in Your Franchise Venture

Since the pandemic, franchisors and franchisees have been forced to cut costs, offer discounts, and demand concessions from landlords, lenders, and suppliers. However, they often overlook the largest expense they have: property tax. Operators often treat property taxes as an annual fixed line-item expense, neglecting the opportunity to save significant cash. Commercial tenants, such as franchisees, may be contractually obligated to pay property tax on behalf of the property owner. Property tax is based on fair market value, and operators must file an appeal with the local government to reduce assessed value and property taxes. Failure to comply with deadlines can result in forfeiture of the operator's right to appeal. Income-producing properties are the most common type of property used to facilitate small business operations, and the opportunity to challenge a property tax assessment should not be ignored.

The following are factors to keep in mind when evaluating the opportunity to reduce your property tax burden:

??Location??

Prime locations that provide convenience, high foot traffic, and ease of accessibility (connection to highways and freeways, transit systems, and parking) typically collect higher market prices, whereas less desirable locations reduce market values.

The hotel industry, which has been named "hyperlocal" when it comes to market value, is an excellent example. Subtle differences in proximity to airports, hospitals, office buildings, and sports facilities have a significant impact on a hotel's market value. For example, two luxury hotel properties may be in the same submarket, close together, and located in the same metropolitan area. However, the hotel property closer to the airport is likely to generate greater revenue due to increased foot traffic. As its earnings rise, so does its market value.

???Physical condition & age???

Modern facilities that are well-maintained command a greater market value, whereas older or less well-maintained properties are normally appraised at a lesser value. The level of maintenance is frequently examined throughout the appraisal process. Deferred maintenance is best defined as a defect requiring repairs that are postponed until a later date. The scope of these repairs extends from chipped paint to structural concerns, which can be extremely costly to the operator. Typically, the expense of fixing or repairing the deficiency is taken from the property's market value. Deferred maintenance is often evidenced by invoices that reflect the cost of labor and materials required to correct the defect.

??Economic variables??

Economic factors, such as the balance between supply and demand, are important factors during the appraisal. At its most basic, when there is a scarcity of a particular sort of property and a high demand for it, market values tend to rise. When supply is great and demand is low, market values tend to fall.

Some assets, such as those in the retail industry, are extremely sensitive to economic swings. Since the pandemic, e-commerce has grown in popularity, resulting in a significant drop in retail market values. As online shopping grows more common, businesses are obliged to adapt and spend their resources on offering an online platform for customers to purchase things. As a result, those businesses must locate warehouses and distribution centers to package, store, and send their products to clients. Then, demand for certain property types rises, while demand for retail properties falls.

????? Depreciation in Property Valuation ?????

Depreciation is a key factor in property valuation, affecting physical deterioration, economic obsolescence, and functional obsolescence. Physical deterioration involves continued use, wear, and nature. Economic obsolescence is the reduction in property value due to external factors, such as proximity to undesirable locations or zoning changes. Functional obsolescence, on the other hand, involves the impairment of functional utility or desirability, often resulting from outdated design, lack of amenities, poor construction, and simple old age.

????? Conclusion ?????

Property tax is granular and is riddled with complexities and nuances, especially when the market value of income-producing properties is in dispute. Now is the time for all business operators to assess whether a reduction in property tax can play a significant role in the financial survival of the business. Partnering with an experienced consultant or attorney will streamline the appellate process and help ensure a reduction in the operator’s property taxes.