Commercial Property Owners take on risks When They Permit Tenants to Pursue Real Estate Tax Assessment Appeals
Tenants can pursue valuation appeals
Connecticut law permits a tenant to pursue a real estate tax appeal if the lease requires the tenant to pay real estate taxes, and the lease is recorded. Most commercial leases also permit the tenant to challenge a real estate tax assessment in the name of the property owner at the tenant’s expense, if the owner chooses not to pursue an appeal. Lease provisions of this type usually require the property owner to cooperate in the prosecution of the appeal.
From the perspective of the property owner, this sounds like a reasonable proposition. If the tenant is responsible for real estate taxes, why not allow the tenant to fund an appeal of the tax assessment? If the appeal is successful and the assessment is reduced, taxes are diminished and the financial circumstances of the tenant within the context of the tenancy are improved; enhancing the tenant’s ability to pay base rent and common area maintenance charges. When the tenant vacates, the owner will continue to enjoy the results of the tenant’s successful appeal, making the property easier to market and maintain.
So … what’s the risk?
A tenant’s appeal can negatively impact the property’s value
If the tenant bases its appeal on factual criteria about the property that is inaccurate, or adopts a position in the appeal that negatively impacts how third parties perceive the fair market value of the property, the owner could suffer an actual loss of property value because of the appeal.
For example, to reduce the tax assessment a tenant may argue in the appeal that an intermittent watercourse running along the border of the property renders a portion of the property unusable due to inland wetland regulations and setbacks. In reality, the small rivulet may not be covered by wetlands regulations. The tenant’s argument, however, if pursued with credibility and made in good faith, might be accepted by the municipal assessor who could reduce the assessment, and make a corresponding note on the property’s assessment record about the wetlands restrictions.
While the tenant will have succeeded in its goal of reducing the annual real estate taxes, it simultaneously created a problem for the property owner. The note on the property’s assessment record now establishes as fact that a portion of the property cannot be used. Any third party looking to purchase or provide financing on the property could be influenced by the notation on the assessor’s record when performing due diligence, and their opinion of the property’s value could be reduced accordingly. In an effort to salvage the contemplated transaction the property owner will now have to bear the burden of explaining the origin of the notation and the true state of affairs to the satisfaction of the potential buyer or lender.
How can a property owner protect itself?
The best way for a commercial property owners to avoid such a trap is to provide the tenant with the option to fund the owner’s pursuit of a tax appeal, with the savings from the appeal ultimately flowing to the tenant through the operation of the triple net lease. The owner will retain total control over the conduct of the appeal, including the information that is utilized to seek a reduction in the property’s tax assessment.
A second option would be to include language in the lease that would require the landlord to be an active participant in the appeal process. Require the tenant to: (1) secure the owner’s prior approval for arguments to be made in the appeal; (2) provide the owner with regular status reports; and (3) provide the owner with copies of all appraisals, administrative and Court filings, notices, and administrative and Court orders. By doing so, an owner will protect both its short and long term interests in the property.
Potential tax savings are maximized when appeals are taken early in the five-year revaluation cycle. Connecticut municipalities conducting revaluations on the October 1, 2015 Grand List include Bridgeport, Fairfield, Greenwich, Newington, Trumbull, Westport and West Haven. Property owners in those cities and towns should be on the lookout for revaluation notices and be prepared to take action if their assessment is excessive.