Industrial Property Tax Appeals for Warehouses, Manufacturing and Life Sciences Properties
Industrial real estate, including warehouses, distribution centers, manufacturing facilities, storage facilities, supply centers, and life sciences properties, can present complex property tax valuation issues. Changes in industrial rents, capitalization rates, assessments, and operating costs can significantly affect the economics of these properties.
Skoloff & Wolfe, P.C. represents industrial property owners, tenants, investors, and large national REITs in property tax appeals and related assessment matters. Our approach combines property-specific due diligence, valuation analysis, and supporting data to evaluate whether an industrial property’s assessment accurately reflects its taxable value.
For industrial owners and tenants, understanding the relationship between rents, occupancy costs, assessments, and property taxes can be critical to managing a property’s financial performance.
Property Tax Appeals for Industrial Properties
Industrial properties have experienced significant changes in rents and market values in recent years. In some markets, industrial rents have increased substantially, while capitalization rates have also changed.
These market conditions can create challenges for both property owners and tenants. A higher assessment can increase property taxes and, for tenants responsible for property taxes under their leases, increase the property’s total occupancy cost.
A property tax appeal can provide an opportunity to challenge an assessment that does not accurately reflect the property’s taxable value. The appropriate strategy depends on the property’s characteristics, financial performance, market conditions, applicable valuation methodology, and jurisdiction.
Industrial Property Tax Appeals for Owners and Tenants
Property tax considerations can affect both landlords and tenants of industrial properties.
For owners, property taxes are an important component of operating expenses and can affect net operating income and property value.
For tenants that are responsible for property taxes under their leases, an increase in the property’s assessment can increase total occupancy costs. This can have a material effect on the economics of the tenancy and the tenant’s overall occupancy expense.
Depending on the jurisdiction and applicable lease and tax laws, commercial tenants may have rights to challenge property tax assessments. Understanding those rights and the applicable filing requirements is an important part of evaluating an industrial property tax appeal.
Understanding Industrial Property Tax Valuation
Industrial property tax valuation requires consideration of more than the property’s headline rental rate. A property’s overall economics can be affected by taxes, operating expenses, capitalization rates, tenant obligations, and other factors.
When evaluating an industrial assessment, relevant questions may include:
- What is a realistic taxable assessment for the industrial property?
- How should current rents and market conditions be reflected in the valuation?
- What happens to the assessment after a property sale?
- Can a new development result in a significant assessment increase?
- How should a property be evaluated following construction or redevelopment?
- How should property tax increases affect the property’s overall occupancy cost?
- Which components constitute taxable real property?
- Which components may constitute tangible personal property or business personal property?
- What tax liabilities apply to the different components?
These questions can require a detailed review of both the property and the applicable jurisdiction.
Industrial Property Tax and Total Occupancy Costs
For industrial tenants responsible for property taxes, the tax expense is part of the property’s total occupancy cost. An increase in the assessment can therefore have an impact beyond the property’s stated rent.
When evaluating an industrial property’s economics, it may be necessary to consider the combined effect of:
- Base rent
- Property taxes
- Operating expenses
- Tenant improvements
- Other occupancy-related expenses
- Changes in assessed value
A property tax increase can affect the amount a tenant ultimately pays to occupy the space. This relationship can be particularly important when evaluating industrial leases and determining the property’s sustainable economics.
Industrial Property Assessment Reductions
Skoloff & Wolfe, P.C. has obtained substantial assessment reductions for industrial and other commercial properties. Examples of industrial property assessment reductions include:
- Reduced a warehouse distribution center assessment from $30 million to $16 million
- Reduced an industrial storage facility assessment from $20 million to $15 million
- Reduced a regional supply center assessment from $14 million to $7 million
- Reduced an industrial production complex assessment from $12 million to $7 million
- Reduced a life sciences campus assessment from $234 million to $60 million
All assessments are rounded to the nearest million. Results may vary depending on the particular facts and legal circumstances of each matter.
Property Tax Planning Before Industrial Development
Property tax considerations should be evaluated before developing or acquiring an industrial property whenever possible. A new warehouse, manufacturing facility, distribution center, or life sciences campus may receive an assessment that is substantially different from the property’s prior assessment.
Understanding potential tax exposure before development can help owners and investors incorporate property taxes into construction budgets, operating projections, financing assumptions, and investment models.
Pre-development analysis can also help identify potential assessment issues before they become part of the property’s ongoing tax burden.
Property Tax Considerations After an Industrial Property Sale
An acquisition can create additional property tax considerations depending on the jurisdiction and applicable assessment practices. Buyers should understand whether the transaction could affect the property’s future assessment and whether the existing tax bill is an appropriate assumption for future operating expenses.
Property tax due diligence can help investors evaluate potential post-acquisition tax exposure before closing a transaction.
This can be particularly important for industrial properties where market values and rents have changed substantially from the property’s existing assessment or historical tax burden.
Industrial Property Tax and Revaluation
Revaluations can materially affect industrial property tax expenses. Owners and tenants should monitor applicable assessment changes and understand when a jurisdiction may be undertaking a revaluation or reassessment.
Advance planning can provide an opportunity to evaluate the potential impact of a new assessment and determine whether an appeal or other available relief may be appropriate.
The applicable procedures, deadlines, and appeal rights vary by jurisdiction.
Real Property vs. Personal Property in Industrial Taxation
Industrial properties may contain equipment, machinery, fixtures, and other components in addition to the underlying land and building. Determining which components constitute taxable real property versus tangible personal property or business personal property can be important when evaluating the property’s overall tax liability.
The treatment of these components varies depending on the jurisdiction and applicable tax laws. A property tax analysis should therefore consider the property’s physical characteristics and the applicable classification rules.
Strategic Industrial Property Tax Analysis
Every industrial property presents different valuation and tax considerations. A warehouse may involve different issues from a manufacturing facility, while a life sciences campus may present different questions concerning specialized improvements, equipment, and property components.
A property-specific strategy can address:
- Current assessment levels
- Market rents and occupancy
- Capitalization rates
- Property operating expenses
- Post-sale assessment exposure
- Post-development assessments
- Revaluation risks
- Real property and personal property classifications
- Tenant property tax obligations
- Applicable appeal rights and deadlines
Experienced Industrial Property Tax Appeal Counsel
Industrial property owners, tenants, and investors need to understand how property taxes can affect both current operating costs and long-term property value. A detailed assessment review can help identify potential issues and determine whether an appeal may be appropriate.
Skoloff & Wolfe, P.C. reviews industrial property tax assessments free of charge. Clients will not be responsible for legal fees unless a tax savings is achieved.
To discuss an industrial property tax assessment or potential appeal, call 973.992.0900.
Industrial Property Tax Appeals Frequently Asked Questions
What types of industrial properties can be subject to property tax appeals?
Industrial property tax appeals can involve many types of properties, including warehouses, distribution centers, manufacturing facilities, storage facilities, regional supply centers, and life sciences properties.
Can industrial property tenants appeal property taxes?
Depending on the jurisdiction, lease provisions, and applicable law, certain commercial tenants may have rights to challenge property tax assessments. The specific requirements and procedures vary by location.
Can an industrial property’s assessment increase after a sale?
Potentially. The tax consequences of an acquisition vary by jurisdiction and depend on local assessment practices and other circumstances. Buyers should evaluate potential post-sale assessment exposure as part of their property tax due diligence.
How do property taxes affect industrial tenants?
When a tenant is responsible for property taxes under its lease, an increase in the property’s assessment can increase the tenant’s total occupancy costs. This can affect the overall economics of the lease beyond the stated base rent.
What is the difference between real property and business personal property?
Real property generally includes land and buildings, while business personal property can include certain movable equipment and other business-related assets. The precise treatment of property components varies by jurisdiction and applicable tax law.
What factors are considered in an industrial property tax appeal?
Factors may include the property’s income, rents, occupancy, operating expenses, market conditions, capitalization rates, physical characteristics, assessment history, and the applicable valuation methodology. The relevant factors depend on the jurisdiction and property.
Should industrial property taxes be reviewed before development?
Yes. Reviewing potential property tax exposure before development can help owners and investors incorporate projected taxes into development budgets and financial models and identify potential assessment issues in advance.
How can industrial property owners evaluate future property tax exposure?
Property owners can evaluate current assessments, local assessment practices, potential revaluations, market conditions, projected property values, and the tax treatment of the property’s various components. Property-specific due diligence can provide a more informed estimate of future tax exposure.
