5 things to know about your commercial property’s tax assessment
When James and Debbie Stephens opened their tax notice, they found that the assessment of the value of their Johnston auto repair business and automotive dealership had increased by $36,000 — from $426,000 in 2015 to $462,000 in 2017. The couple has owned their business for 28 years. They acquired the site in 2000, and they employ five people including themselves.
“We’re in a flood zone, and there hasn’t been a lot of improvements down here,” says Debbie Stephens of the business, located at 5320 N.W. Beaver Drive. “I go ahead and protest the taxes. We’re a small business, and we have to keep our taxes in check for us to be able to afford it with all of the taxes and insurance we have to pay.”
Debbie appealed the assessment in person at the Polk County Assessor’s Office. In the end, the Stephenses were granted a $43,000 reduction in the assessed value of their property, which brought it down to a value of $419,000.
Commercial property taxes are one of the biggest operating expenses a business can have, according to Real Property Tax Advisors, a property tax services company that has been in operation since 1972. A successful appeal could save thousands of dollars or more and reduce overall operating expenses.
Here are some questions to consider:
1. How do commercial property taxes work and what affects them?
Commercial assessments happen in conjunction with residential and determine the value of the property as of Jan. 1 of each year. Properties are assessed on an annual basis, but they are revalued on odd-numbered years, and all property owners receive a mailing of their assessment at that time, says Randy Ripperger, the Polk County Assessor. If there is no change in value, the assessment will stay the same.
The county assessor’s job is to estimate the fair market value of all property, whether it’s commercial or residential; it does not determine tax rates or calculate or collect taxes, he says. The valuation is based on the
fair market value, which is determined using three approaches: market, which includes sales of similar properties and the probable sale of the property being appraised; cost, which estimates labor and material prices it would
take to replace the property with one that is similar; and income, which is an estimate of the business’ ability to produce income.
New assessments will be issued in early 2019.
Property owners pay taxes based on each $1,000 of assessed value (see more information in sidebar). A business’ total tax bill is calculated based upon the budget and tax levy that each entity that receives property
taxes sets. In Polk County, these are: the local school district, the city in which the business resides, Polk County, Broadlawns Medical Center, the Des Moines Regional Transit Authority, Des Moines Area Community College, Polk County Assessor, Polk County Ag Extension and the State of Iowa.
The majority of taxes go toward the budgets to support the school district and city where the business is located, along with the county. The amounts can vary, but according to the Polk County Assessor’s Office, about 90
percent of property taxes that are paid go to these three entities.
All property owners will receive new assessments at the beginning of 2019. Ripperger reported property owners could see a 10 percent increase in 2019 when assessments are sent out. In 2017, assessments increased an average of 8.5 percent, according to the assessor’s office.
The assessor’s office is mandated by state law to assess properties within 95 percent and 105 percent of their market value, Ripperger says.
Sales ratios — the ratio of dividing a property’s assessment by its sales price — are currently running lower than this amount, which is why Ripperger says he predicts a 10 percent increase to meet legal guidelines.
2. Should you appeal your property assessment?
The Stephenses aren’t alone in their appeal of their assessment. There are 180,000 parcels in Polk County, and about 10 percent of those are commercial, industrial and other nonresidential properties. In 2017, between 50
and 60 percent of the non-residential property owners who appealed their assessment received some sort of relief, Ripperger says.
“I think everybody should” appeal their assessment, Debbie Stephens says. “You shouldn’t have to pay any more taxes than you need to.”
Many business owners don’t know that appealing their assessment is an option, property tax experts say.
Tom Bernau appealed the assessment for an office building he owns at 6165 N.W. 68th St. in Johnston. Bernau’s business, Bernau Capital Partners, invests in and develops small and middle-market businesses and owns about 150 properties of various sizes and uses.
Higher assessments have a trickle-down effect depending upon the terms of a lease, Bernau says. The building owner could include the property taxes in the terms of the lease, pay the taxes themselves, or split them among the tenants. Regardless, there’s likely to be an effect on the tenant, he says.
“It’s hard on a tenant if the owner of the building doesn’t protest the taxes or keep them at the appropriate market rate,” Bernau says.
He himself is a tenant in several buildings, and it can be a challenge to keep a business afloat when a landlord doesn’t do his or her part in keeping taxes low and costs down for the tenants.
“It can be financially hard,” Bernau explains. “It can put them out of business or on the ropes.”
3. Is an appeal justifiable?
Dorrance Brezina, a broker with Developers Realty Group in Urbandale, says he receives calls from clients every time new assessments are sent out and at each tax pay period in March and September. The first question he asks clients who say their taxes are too high is: “What makes you feel that way?”
Many times, it’s an emotional response because commercial property taxes are higher; however, Urbandale has some of the most reasonable rates, he says.
After emotions settle, business owners need to conduct research or hire a professional to help them determine the answer.
Brezina says the county assessor’s office has constantly updated sales information it uses to help determine assessments. It uses averages, and, for the most part, the process is “pretty fair,” he says.
Commercial property values fell greatly after the 2008-2009 recession, but they are beginning to rebound, Brezina says.
There are areas of the Des Moines metro that are expanding, meaning the commercial tax base has grown in those areas, and that money is being re-invested in the communities, he says. Municipalities use tax dollars to pay for employee salaries, public safety measures and other items that are paid for through their operating budgets.
The Polk County Assessor’s Office also suggests property owners consider whether they could sell their property for the amount the assessor suggests it is worth. If the answer is yes, then the value is likely correct. However, the assessor’s office considers these points as reasons for filing an appeal:
• The assessment is not comparable to others with similar properties.
• The property is assessed at more than its actual value.
• The property is exempt from taxation.
• There is an error in the assessment.
• The assessment is fraudulent.
4. How does the appeal process work?
Taxing jurisdictions will have a deadline for commercial property tax appeals, which is why commercial property owners should begin to collect information now about their property and comparable properties, according to RealProperty Tax Advisors.
Multiple methods are available for appealing a commercial property tax assessment, some of which are similar to
how residential appeals are submitted and processed.
Business owners need to ensure they know all deadlines, have the appropriate forms and and collect all the evidence they’ll need to file their property tax appeal.
• Note whether these are “received by” or “postmarked by” dates.
• Confirm how the appeal needs to be received (i.e. mail, fax, online or in person) and correct mailing addresses.
• Double-check the correct forms are being filled out.
• Determine which type of documentation is needed to support the appeal.
The county assessor’s office must notify the property owner of the assessed value in writing by April 1. The property owner can then request a review with the assessor between April 2 and 25. If an agreement is reached, no further action is needed. Property owners can appeal their initial assessments to the review board or request a formal review by the board by filing a written protest between April 2 and April 30. If April 30 falls on a weekend, the deadline is extended to the following business day. Petition forms are available at the assessor’s office or from the website: www.assess.co.polk.ia.us, under the tab “Protest Information.”
Ripperger says an informal appeal can shorten the process for property owners if the owner and an assessor come to an agreement about the value of the property.
The Board of Review, which comprises representatives from area mayors, supervisors and school districts, hears all formal appeals. If the protestor wants to have an oral hearing before the board, that must be written in the
appeal. The board will make its decision, and then any appeal that is denied can continue on to the state’s property assessment appeal board or district court.
The review board reviewed about 8,800 residential and commercial appeals in 2017. In an even number year, it reviews fewer than 1,000, Ripperger says.
Portions of Grimes and Urbandale are also located in Dallas County, which follows the same review process and deadline dates. Dallas County’s review board has five members, and its protest form is only accepted via fax or U.S. postal service.
The review board may request the following information:
• A copy of an appraisal
• A copy of a sales agreement
• An itemized listing of any-and-all construction, remodeling or repair costs
• Income and expense statements with rent rolls
There were 1,741 commercial parcels in the county in 2017. Of those, 73 appealed their assessment, and 12 received an adjustment in valuation, according to the Dallas County Assessor’s Office.
5. What criteria do you need to include?
Every two years when the taxes are re-assessed, Bernau and his team compare the new assessment against what they think are the market values of those properties to determine whether they think the assessment is fair. If the assessment has gone up by a large amount — they’ve had some buildings increase in value by 50 percent in two years — they’ll appeal.
The team conducts an internal assessment based on the building purchase price, the increase in the market value, information about comparable sales, and the revenue that is generated from the building to determine the cap rate or capitalization rate, which is the ratio of the amount of money a property produces to the purchase
price of the property. The cap rate is usually different for different classifications of buildings whether they are retail, strip malls or business.
Online resources including www.loopnet.com or www.costar.com are commercial real estate websites, Bernau
says, that business owners can use to compare other properties and determine their value.
Bernau says if the property is a recent purchase, they’ll use the arms-length transaction amount as the best evidence of the value of the property. They’ve had situations where an assessment of a property has increased within six months of buying the property, and this method is used to appeal the increase, he says.
Brezina recommends his clients obtain the information from a qualified real estate agent or appraiser.
In general, business owners themselves or their hired expert should collect and provide:
• Information about sales in the area, specifically comparable sales based on square footage, location either in close proximity or a similar economic neighborhood or community.
• An appraisal of the property in question (the appraisal is considered confidential to the person who orders it)
• Income for the business
• Expenses for the business such a rent history and three-years’ worth of expenses
All information that is collected needs to be used to dispute the value that the property is assessed at for the current year. ♦