By Martin S. Katz

As published in Value Retail News, September 1996


In the real estate market of the 1980’s, when retail sales, occupancies and rental rates were all at their peak, property taxes on shopping centers were treated as little more than “just another expense”. Owners and developers passed virtually all of the taxes through to their tenants, whose businesses were mostly successful, under triple net leases. Reimbursements were made by the tenants, generally without complaint, and the taxes were paid by the owners without thoughtful and professional analysis of whether the basis for the tax was fair and appropriate.

With the commercial real estate crash of the early 1990’s resulting in increased vacancies, tenant turnover, reduced rental rates and a return to leases which do not provide for complete tax pass throughs to tenants, it is both prudent and, in many cases, mandatory, for an aggressive review of the assessment which forms the foundation for a shopping center’s property tax bill.

Ad valorem taxes indicate that the amount paid by an owner should be in relation to “value”. It has long been acknowledged that the successful operation of a shopping center is dependent upon both the business acumen of those charged with management and the “real estate” value. Although this concept has been generally accepted, and is both logical and reasonable, the difficulty in quantifying that portion of the economic value of a shopping center which is attributable to the “business” skills of the owner/manager has resulted in any allocation for property tax purposes being virtually ignored by governmental authorities.

At a recent Seminar, sponsored by American Property Tax Counsel, the National Affiliation of Property Tax Attorneys (APTC), representatives of many of the nation’s major shopping center developers gathered with the attorney members of APTC (a group comprised of 20 of the most experienced and prominent law firms in the property tax field across the U.S. and Canada) to share ideas and to discuss specific approaches to reducing property taxes on shopping centers by establishing specific methodologies for allocating “business” or “intangible” value for tax purposes.

Although the issues covered at the Seminar are too numerous to discuss in significant detail, they included an analysis of the manner in which newly acquired shopping centers are depreciated for federal tax purposes and the corresponding effect on capitalization rates which are determined by assessors in establishing market value. Other issues explored were the allocation by assessors of the value of a shopping center between anchor and mall tenants and a review of the owner/developer’s operating statement regarding appropriate adjustments for income sources such as stroller rental and overages charged to tenants on utilities and insurance.

There are also different approaches to an appeal which must be considered according to the type of shopping center under review. Regional malls, community centers and power centers must be categorized separately in view of the potentially different market conditions affecting these properties at the same point in time. As an example, power centers and big box retailers were, until recently, the popular market product, but there are indications that overdevelopment will cause their failure in substantial numbers.

Also, it may soon become necessary to factor into any property tax analysis of a shopping center’s market value, the potential future effect of technological advances on the retail industry. Convenience for the customer is served by the “shopping by computer” concept which may dramatically affect not only the size and mix of retail stores in a shopping center, but also the manner in which products are distributed.

With the current state of the retail market, it is both prudent and essential for shopping center owners to seriously reconsider the manner in which the taxes on the properties in their portfolios have been reviewed. A professional, aggressive appeal of each property’s assessment by experienced, local attorneys who are creative and sophisticated in their approach regarding the issue of “real estate value” can and will result in reduced taxes and, correspondingly, “value added” to a shopping center developer’s net worth.