Commercial property owners on the island and around the county whose businesses were hurt by the pandemic stand a good chance of getting a property tax reduction in 2021. The same holds true for tenants whose leases make them responsible for paying property taxes.
The taxable value of commercial property is based on three criteria, according to Indian River County property appraiser Wesley Davis: how much it would cost to replace the building, recent sale prices of comparable buildings and – crucially – the amount of income the property generates for its owner or tenant.
“We look at all three, but mainly focus on one over the others that is most accurate, looking at the building’s highest and best use,” Davis says.
Often that is cash flow, because that is how most investors value commercial property. They look to see what percentage of their investment the building will pay back to them each year in lease or other income.
“The place I am building will cost about $2.6 million [to build],” says developer Joe Foglia, who is constructing a small office building near the courthouse. “And truth be told, that is probably about all it will be worth sitting empty. But I plan to lease it up and get lease rates up to a certain level and at that point it is probably worth $4 million [to a smart investor]. Valuation is all about cash flow.”
That is especially true with certain types of properties, according to Davis. “Take hotels,” he says. “Not enough of them sell here for comps to be relevant, and replacement value isn’t accurate, either. The same hotel building out by I-95 and on the beach would cost the same to build, but the one on the island is obviously more valuable because it generates more income per door.”
Davis says commercial property used for “retail, restaurant or hospitality of any kind” are properties that will be considered for tax reductions, along with any other “income producing property,” such as office buildings and apartment complexes that lost income.
Davis says it is too early in the valuation process to know how much property taxes could be reduced in general or on specific properties. “All I can base this on right now is that the commercial economy was shut down for about 25 percent of the year,” which drastically reduced income for many businesses.
Property tax payments are “a meaningful part” of business expense, according to SLC Commercial Vice President Mike Yurocko, whether for a small business person operating a restaurant in a building they own or for an investor who owns and leases out storefronts in a shopping center.
“A lot of tenants are asking for rent abatement,” says Yurocko. “When that rent drops, then income drops, reducing the net cash flow to the building that determines its investment value.”
“Many landlords have had to make rent concessions during the crisis,” agrees Billy Moss, an agent with Lambert Commercial Real Estate. “Most everyone has asked for concessions and most property owners have been sensitive to that.”
Property tax bills can be steep for businesses that generate substantial income. Costa d’Este Beach Resort, for instance, paid $178,000 in property tax in 2019, while the office building at 3001 Ocean Dr., across from Humiston Park, paid $160,000. The Holiday Inn at Sexton Plaza got a bill for $126,000, while the Ocean Grille’s property tax tab was $57,000.
If the owners and investors behind those properties can show they lost significant income in 2020 compared to 2019, then Davis is prepared to consider adjusting their tax bill.
The same holds true for smaller businesses, including those that own their buildings and those that lease with what is called a “triple-net lease,” that makes them responsible for maintenance, insurance and taxes on the properties where they operate.
“People should be getting their paperwork together,” Davis says. “If they can come in here and show us how the pandemic affected their bottom line, we can take that into account as we are massaging the numbers. We need to hear from [business owners and investors] because we are not privy to their bank records and financial statements.”
Because property valuation is complex, some businesses and investors hire specialty firms to help make their case for tax reduction.
“I use Ryan,” says Keith Kite, a commercial real estate broker and investor who has ownership and management stakes in three hotels in Vero Beach, along with a number of strip centers and other commercial properties.
According to Ryan, a global tax management firm that saved its clients billions on their tax bills last year according to its website, “the potential impact on profitability makes it imperative to manage and mitigate your business property tax liability.”
After looking at Kite’s books, the firm told him that 40 percent of his properties should be reviewed for a tax reduction in 2021.
Springhill Suites and Hampton Inn on Miracle Mile, where Kite is managing partner, paid $58,000 and $66,000, respectively, in 2019, so a substantial property tax reduction could be good for his bottom line.
If businesses of a certain type show income losses that reduce the value of their property, Davis says he will try to extrapolate that to other businesses of the same kind, reducing their taxes, too. “The root of the whole effort is to be fair and equitable,” he says.
“If we have several hoteliers come in and say they lost income, we will take that into consideration valuing other hotels.”
Trim notices with proposed property values will go out next August, but those who think their property tax should be reduced next year should not wait until then to seek relief, Davis says. Instead, they should contact the Property Appraisers’ office early in 2021, while valuations are being calculated, to make their case.
