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This spring marks the second anniversary of the beginning of the COVID-19 pandemic and its wide-ranging effects on society and the economy. But while the pandemic has affected the economy—and commercial real estate in particular—for two years, owners of property in Marion County have not yet seen changes on their property tax bill that reflect those impacts.
There are three related reasons for this. First, the pandemic didn’t begin affecting businesses and real estate in the United States until spring 2020. But property in Indiana is assessed as of Jan. 1, so the 2020 assessment wasn’t impacted by the pandemic. Second, taxes are not paid until the year following the assessment, so taxes for the 2021 assessment—the first to occur after the pandemic’s spread—are not paid until 2022. Third, appeal deadlines in Marion County are based on when tax bills are mailed, unlike in neighboring counties where separate notices of value are mailed.
Together, these factors mean that this spring, for the first time, taxpayers will have the opportunity to highlight the pandemic’s effects on their properties and seek to have their tax bills reduced accordingly.
The pandemic has impacted different properties in distinct ways. Hospitality properties have been among the hardest hit, with leisure and business travel grinding to a near-complete halt and remaining at a fraction of pre-pandemic levels. Office properties have also been hard-hit: first by initial shutdowns and remote-work policies, then by tenants reconsidering their space needs. Retail centers that have housed restaurants, fitness centers, and brick-and-mortar stores have seen vacancies become the norm.
In short, the pandemic has had—and will continue to have—both short-term and long-term impacts on commercial real estate.
Counter to these real-world trends, though, a review of the 2021 assessments issued by Marion County suggests that most commercial property values were flat or increasing. While there may be many reasons for this discrepancy, one factor is that the assessor’s office does not appraise each property each year. Instead, values are trended from the prior year using sales data. But in periods of economic turmoil, investors flock to the safety of the best-positioned assets. The resulting high prices can lead to the false impression that the market overall is improving, but only because the best assets are selling.
Given these dynamics, prudent taxpayers should consider whether these assessments fairly reflect their properties’ values in January 2021 and whether to appeal their assessments while the limited opportunity is available. In weighing the risks and benefits of an appeal, taxpayers should be mindful of a few issues.
Document the impacts. Because the impacts of the pandemic have been uneven, it will not be enough for taxpayers to simply point to the pandemic as a basis to reduce assessments. Obtaining meaningful relief will require each taxpayer to effectively document the impact of the pandemic on their properties leading into 2021, with a focus on rents, concessions, vacancies, and property characteristics that would influence tenants or buyers.
Separate business and property. Do not conflate a business’s success or failure with that of the real estate. The relevant question is how the property was affected by the pandemic. The fact that business has boomed for certain retailers does not mean retail real estate is more valuable, and the fact that a restaurant shut down does not mean its property is worthless. Focus on real property fundamentals.
Past may not be prologue. An assessment is a snapshot of a property’s value as of a moment in time; here, Jan. 1, 2021. But just because a property was fully leased in January 2021 does not mean its value was not impacted by the pandemic. The real question is what market participants expect to happen in the future. Will all those tenants renew at comparable rates when the time comes? Will tenants have to be incentivized with substantial concessions? Or will vacancies expand on a rolling basis as tenants reconsider their needs?•
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Blair is an Indianapolis-based tax litigation partner at Faegre Drinker.
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