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Over the past three years or so, most segments of the real estate market have experienced a tremendous amount of uncertainty. The consensus seems to be that while most of the population has returned to normal life, more uncertainty lies ahead for various sectors of the real estate market. Generally speaking, there has been a slowdown in activity across property classes that will continue to unfold over the next few months, directly impacting 2024 property tax assessments. Further months will affect tax appeals for 2023 and beyond.
First and foremost, 2023 will be the first year that the equalization ratios we use to calculate the market value implied by valuations will truly see the impact of upside in the housing market. As a result, while not all types of real estate are rising in value at the same rate, constant valuations in certain municipalities are 10% to 20% higher in market value than they were three years ago. may reflect. This is because the residential market accounts for the majority of the sales included in the ratio study, thus driving the ratios that apply to all property types. These ratios apply to all property types regardless of specific market performance. Changes to the equalization ratio are largely behind the scenes and most relevant to property tax appeals, so most taxpayers see their valuations staying the same and their taxes going up a bit each year. Other than that, I don’t think anything has changed. Therefore, it is not always clear whether tax appeals are warranted.
We have also seen far more municipalities conduct annual reassessments in the last five to ten years. In these municipalities, changes in the market could see the valuation itself increase by 20% or 30% from three years ago. There was a time when year-to-year changes in assessed values could lead to large changes in property taxes from one year to the next, but more recently, relatively large changes in assessed values have resulted in relatively small tax amounts. We see a situation that brings about change. So while being assessed 10% higher than last year and 20% higher than 2021 is alarming, the increase is likely to fall as the overall tax base value increases. It may not lead to an equivalent tax increase. In such cases, it is important to review the relevant data to avoid filing an appeal before deciding whether the appeal is worthwhile.
Commercially, the office building was largely vacant from March 2020 to 2021, but tenants leaving leases for larger spaces were essentially unheard of. However, given that remote work is taking hold in various industries, as leases near their end, it’s likely that additional vacant space will be added as businesses reassess their need for space. Rents are likely to come under downward pressure as vacancies rise and the need for space declines, and in some markets rents have remained broadly flat over the past decade or more.
To combat this trend, many owners are investing heavily in facilities to attract new tenants and retain existing ones. A flight to quality can occur as these upgraded spaces become available. At the same time, large investments may do more to solve vacancy problems than raise rents, and tax assessors use such investments to justify increased assessments. can be However, if rents are somewhat flat, we may not see a corresponding increase in value to justify an increase in assessed value. As such, the future of the office market and its valuation remain uncertain.
The condominium and industrial markets remain strong, but headwinds are increasing. Apartment owners in particular have seen a steady increase in collections and expenses since March 2020. While rents are generally at or above his pre-COVID levels, many landlords are grappling with rising expenses across the board while dealing with the aftermath of moratoriums on evictions. As local governments have grown accustomed to charging premiums on apartment valuations, market shifts have forced local governments and property tax lawyers to reassess assumptions that have become somewhat standardized over the past five to ten years. There may be.
Industrial markets also remain strong, despite slowing rent growth in some areas. Markets look very different than they did 15 years ago, with increased e-commerce and corresponding increases in industrial value, but value growth may have slowed. As infill development begins in areas that were once vacant or underutilized commercial buildings, rents can drop and vacancies rise in more remote locations. Meanwhile, quality new industrial properties near populated areas will continue to demand a premium. As a by-product, lower-quality older properties in those same neighborhoods can add a premium to valuations by local governments that may not exist on the market.
As the above shows, the housing market primarily sets the equalization ratio that applies to the valuation of all property types, but there are many other factors that affect the value and taxes of all other property types. I have. As these factors continue to change, the property owner will have an annual assessment by an experienced property tax attorney for his annual filing deadline of April 1 or May 1 in most local governments. review becomes more important. And in the municipalities of Burlington, Gloucester, and Monmouth counties, he has a January 15 deadline for properties valued at less than $1 million. Since most attorneys complete valuation reviews free of charge and usually handle appeals on a contingency basis, the taxpayer’s cost to start the process is relatively small. By comparison, paying more than your fair share each year can cost you quite a bit.
Michael Rienzi is an Associate at Brach Eichler LLC in Roseland. Since 2007, he has practiced law on behalf of New Jersey taxpayers in the area of property tax litigation.
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