[This article originally appeared in the New England Real Estate Journal, April 25, 1997.]
Proactive management of property taxes is important to a shopping center’s leasing program and to the owner’s wallet. Familiarity with local market conditions and seeking tax abatements when necessary are the keys to a successful tax management program. Shopping center owners typically pass real estate taxes through to their tenants. Nevertheless, the assessed value of a shopping center should not be ignored for two important reasons. First, if a particular center’s taxes are higher than comparable centers then occupancy costs will become non-competitive and it will become harder to keep existing tenants and attract new tenants. Second, in most instances, owners pay taxes for vacant space out of their own pockets.
Knowledge is power when it comes to tax abatements. Under New Hampshire law, a taxpayer is entitled to a tax abatement if a taxpayer has paid a disproportionate share of the municipality’s tax burden.
The key issue in most tax abatement cases is the proper determination of fair market value. With shopping center properties, because there are fewer comparable sales, the most common method for determining fair market value is the capitalization of income approach. Under this method, fair market value is determined by dividing the net income of the property by a capitalization rate. Establishing net income and the proper cap rate is where the tax abatement game is won or lost.
Unique complexities arise for shopping centers with several vacant units or with multiple below market long-term leases. A shopping center owner will want to use the actual income figures and actual occupancy levels in calculating fair market value. In steady or rising markets, assessors will strongly resist attempts to use actual vacancy rates and rents and will try to use numbers which they believe are more representative of current market conditions. New Hampshire court cases on this point contain some unfavorable language for shopping center owners — noting that, in some circumstances, actual income may not accurately reflect the property’s true present value because vacancies may result from poor management rather than poor market conditions and below market rents may result from poor leasing decisions or may reflect different market conditions. See Demoulas v. Town of Salem, 116 N.H. 775 (1976).
Therefore, if a municipality presents evidence showing that the property could command higher rents than those actually obtained under existing leases, the burden of proof shifts to the shopping center owner to demonstrate that actual rents accurately reflect the property’s true income producing capacity. Furthermore, for newly acquired shopping centers, owners should assert that the purchase price paid for the property better reflects fair market value than any estimates generated by the capitalization of income approach.
With so much at stake, proper advance planning and information gathering is critical to a successful tax abatement case. A moderate investment in experienced professionals can result in substantial long-term savings.