Industrial Impacts Episode 3: Property Taxes
Industrial Impacts is the new podcast by Cresa’s Industrial team in Denver, Colorado. In our third episode Matt Burton and Mike Statter dig into the topic of property taxes and how they are assessed.
Every two years, whether our clients own or lease, they are faced with rising property values and they are always curious as to how these assessments are handled. Today we’re talking with an expert on the subject, Lisa Frizell, who is Colorado’s Douglas County Assessor.
What does the property tax cycle look like in terms of reassessment? What information is used to assess the value of properties?
Lisa: Of course, I am happy to share this information.
So, what we refer to as reappraisal in the assessor world, occurs in the state of Colorado every two years.
All assessors in the state of Colorado are required to do things the same way, at the same time, that was part of the Gallagher Amendment in the state constitution that was enacted back in 1982.
Every two years, in odd number years, we re-value all the property within our boundary. Everything we do in the assessor’s office is dictated by Colorado Law. So, Colorado law tells us that we create a level of value that is based on the appraisal date that is June 30th of the year preceding the appraisal year. So, for the 2019 reappraisals, for example, the appraisal date was June 30th of 2018.
That’s an important date because that establishes the level of value that we look at. We take a snapshot of what the market looked like at that point in time and what property was selling for. What were lease rates and that sort of thing. So, that appraisal date is very important.
Let’s say, a user occupies and owns a 50,000 square foot building. Would you look at buildings that sold within the last couple of years in the 40 to 75 thousand square foot range, or how does that work?
Lisa: Yeah, so that’s a great question. The way we value property is based on a couple of different things. So, first of all when we’re looking at sales of property, Colorado law tells us to go back 18 months prior to the appraisal date to gather sales information. We also have the ability to go back in 6-month increments, up to five years from that appraisal date. So that’s really important, especially for smaller counties that don’t have the number sales that some of the larger counties do. Say, if you’re in Baca county you may not have, but maybe one or two commercial sales.
Mike: Yeah that’s not a lot of relevant data.
Lisa: No. So, they have the ability to go back in time. We do use out of county sales, but we have to be really careful when we do that with any property type. We never use out of county sales for residential property, but we do for some specific property types. One example of that is apartments, because we will see those institutional buyers and sellers, it’s just a different kind of market. So, the same thing is somewhat true for industrial property and commercial property. But, for a Douglas County example, wouldn’t travel much further than say Arapahoe County because once you get north of that it’s a really a totally different market.
We do try to compare apples to apples as opposed to apples to oranges. So we wouldn’t use the sale of a 10,000 sf industrial condo to value a 70,000 sf industrial warehouse. That’s just not appropriate.
Does your office do all of the appraisals? I mean, do you have a staff of people that accumulates this information?
Lisa: I do, I don’t do it all by myself. I do have a staff of commercial appraisers. We have a staff of land appraisers. We have residential appraisers and they all tend to very much specialize in whatever property type they’re assigned to.
Of course, it’s the old saying “garbage in garbage out”. So, one of the most important things that our appraisal staff does on a continual bases is sales verification. So, if a property transaction occurs, it’s the appraiser’s job to really delve into that transaction and understand it. They may talk to the buyer; they may talk to the real estate agent. They may talk to tenants even. One thing that is very important is that they make sure they understand what was included in that purchase price. Was there personal property? What did the real estate itself actually sell for? So that’s a very important question to answer in our world, because were not valuing business value. In fact, we can’t value business value. We have to really understand what the real estate sold for.
Mike: Yeah in other words, a 20,000 square foot building on an acre and a half is a lot different than a 20,000 square foot building on 10 or 15 aces. When I go the county website there’s an assessed value for the land and an assessed value for the building that makes up the total assessed value, correct?
Lisa: That is correct, we have to make sure that we allocate value to both the land and the buildings. Especially with the income approach it’s more of an apportionment of land value than anything else. Because the income approach really encompasses everything, it includes the land. So that’s important to understand.
When do you use the income approach verses the comparable sale approach?
Lisa: One thing that is important to understand is that in assessors offices, and this is true everywhere in Colorado and nationally and internationally in many cases- we do mass appraise. So, it’s a little different concept from what a fee appraiser does. A fee appraiser will accept an appraisal assignment of a specific building and it may take them anywhere from one to four weeks to compete that assignment, depending on the complexity of the market and of the building itself.
I have four commercial appraisers for about 5,000 commercial parcels, so obviously we can’t spend between a week and 3-4 weeks on each individual building.
Mike: Yeah, Matt and I just mouthed “wow”.
Matt: Yeah, that’s a lot. That’s impressive.
Lisa: It get’s worse if you’re talking residential. I have 12 residential appraisers and we have about 120,000 residential parcels.
So you can see there’s a great need for efficiency in what we do. We create mathematical models for properties for property evaluation purposes. And that’s true whether it’s residential property, vacant land, or commercial property.
So, what does that look like? For commercial properties it’s actually much simpler than residential evaluation. We will create market models, and what that looks like is we stratify properties based on several different factors. We’ll combine say properties that are older within a square footage range. So, it depends on what age they are what their square footage is, where they’re located. We really try to look at what those market factors are. If you are looking for an industrial property and you’ve got X dollars in your hand, where are you going to look and what properties are you going to look at basically. We are trying to emulate that decision-making process. We stratify those properties and we put them in model groups and then we take the sales of alike properties and usually it depends on which type of property it is. In any given reappraisal year, we can have a fluctuation in the number of sales, but ideally you have at least 6 to 20 sales that you can use. You look at what they sold for on a per square foot bases. Trying to account for any nuances associated with that transaction.
Mike: Yeah, built property attributes.
Lisa: Right. Then we group them. We look at what they sold for on an average dollar per square foot basis. That’s essentially reapplied back to the unsolds. It’s a calculation process.
For the market approach we are looking at sales only, and that’s a very important distinction. When it comes to the income approach, we have a lot of difference resources that we use. We of course look at Costar. We ask property owners for their income and expense information, so that we can gather property-specific information.
I don’t know why, but no one is too excited to give out the information to us. It’s very unusual. There is sadly still a fundamental distrust of what we do in the assessor’s office. We’ve never been able to quite crack that nut.
Mike: Yeah, I would tell you Lisa that that’s not uncommon in our business, in brokerage and real estate advisory. Most shops view that information, not as proprietary, but having that information gives them a little bit of an edge over their competitors. The more robust your comps database is, the more fluent you are going be able to be in front of clients. So, they are typically kind of reticent to give that out.
Lisa: We sure understand that, that’s one reason why that information is among the very small amount of classified information in the assessor’s office and income and expense information for commercial properties falls under that umbrella. We are not allowed to divulge it at all. That’s important for me to tell people. We don’t divulge it and we can’t divulge it and we take that very seriously.
Matt: Lisa, this is Matt, when you are looking at property and there is obviously an operator, and let’s just use an owner operator for example, are you looking at the assessment differently when the asset is rolled up within the business or owned by the principals in a separate LLC and leased back?
Lisa: We are only looking at the real estate. We can’t look at the business value at all. It is something we don’t acknowledge, period.
When you use the income approach, there’s another piece of that which is what the prevailing cap rate is for similar type properties. Maybe you can talk about that for a second.
Lisa: We do create income models, just like we create the market models, and so again it is based on that stratification of property. Income models are probably best applied to leased property, not owner-occupied property. But that doesn’t mean we can’t apply market income and expense information to owned occupied.
Part of that model is the cap rate. We do some significant analyses on cap rate and we tend to be a little high on our cap rate. It’s probably a benefit to the taxpayer more than anything else.
One thing that’s important when talking about the income approach is that our process is significantly different from say the process of someone who is going to go out and buy a property for investment purposes, because they have a proforma of what they are expecting down the road and what the income and expenses in the future are going to look like and that drives what they are going to purchase property for.
We can’t acknowledge that, because everything we do is in the past. That goes back to understanding that appraisal date and the significance of that date, because we have to look at what that property was worth as of June 30, 2018 in this particular case. I can’t look at what it will look like in the future.
As a result, the cap rates that we see that drive purchases in the market tend to be much more aggressive than what we apply. We do different studies. We have resources that we rely on quite heavily.
Mike: Once a property is appraised, that’s like the first or second step, then we come to all the individual mill levies that are applied by school districts and all of the different things that make up that total tax rate.
One thing I’ve always had a hard time understanding is how those mill levies change from assessment period to assessment period. Can you describe the individual line items that make up the total tax rate and how those are determined and applied?
Lisa: There are three components to a property tax dollar amount. One is the property value which is set by the assessor. The second one is the assessment rate. We have two assessment rates in Colorado. We have the residential rate, which is set by the state every two years. For all other property, according to the Gallagher Amendment from 1982, all other property is assessed at 29 percent. So, you have the property value set by the assessor, the assessment rate that comes from the state and then the third component is as you said, the mill levy.
You have a total mill levy that is applied to calculate a property tax. But that total mill levy is comprised of the individual levies that are set by the entities that provide services to that property. For example, the property may lie in a fire protection district and a water and sanitation district and will lie within school district. It may or may not be in a municipality. There are various entities that provide these services to the property, so the summation of all those levies is what is used to calculate property taxes.
Mike: The total levy. Which is then applied against the assessed value, which is 29 percent of the appraised value for commercial properties.
Lisa: Exactly, and so how those individual taxing entities conclude their individual mill levies, is a bit of a process. So, I always tell people the whole reason why assessors exist is to support local government services.
Which is true, because the way that the calendar works, is that at the very beginning of the year, is the assessment date, January 1st. We look at what all property is used for and how it exists, if it is under construction, not under construction. As of that date, that’s the assessment date, then we value the property and send that notice of value to the property owners at the beginning of May and there is an appeal process. At the end of August assessors have to report the value of all the properties within a taxing entity boundary to that taxing entity.
For example, if you have Parker Water and Sanitation District, we will create an abstract in certification that tells Parker Water and Sanitation what the value of all the property is within their boundary, the actual and the assessed value – it’s also split up by type of property. Is it commercial, residential, business, personal property, that kind of thing. Parker Water and Sanitation will then take that value that we report to them and certify to them and look at their budget for the following year and literally it is a calculation of their budget amount and their assessed value and that is how you calculate a mill levy.
That process takes a number of months because Parker Water, like any other taxing entity, has a board and a budget process. They will have budget hearings and follow a process. There is a significant opportunity for public input anywhere between August and November of every single year when that budget process is going on and those hearings are occurring.
So, the individual mill levy line items can change from year to year?
Lisa: Not only can they, they do.
Okay but the appraised and assessed values are set for two years?
Lisa: That’s correct. Since we revalue everything two years in odd number years, in those even numbered years, we call those intervening years, we don’t adjust value unless there is a significant change to the property.
So, in the case of a residential property, if someone finishes their basement or adds onto the house, that would be cause for us to change the property value. In the case of commercial property, it’s the same kind of thing. Typically for commercial property we will see additional tenants finish especially in properties that are in that transitional period of being newly constructed or they are building out.
Mike: That’s a really good summary of how property taxes are arrived at and how they are constructed.
If someone wants to contest their property tax evaluation, can you describe to us what’s involved in that process?
Lisa: Of course, I’d be happy to. The appeal process begins at the assessor level during the month of May every single year. So, we just completed the assessor level appeals of 2019 on June 3rd. I think I’ll speak for all assessors in Colorado, when I say that we strive to make sure our values are as fair and equitable and accurate as possible. Do we get it right every time? No.
I will also speak for my fellow assessors and say we want to and we very much appreciate the opportunity to get it right. Because no one should pay a penny more in property tax then they are obligated to, at all. We want to make sure the value is correct, if we missed it, I really want the ability to make it right. I encourage property owners whether it’s a residential or commercial property or someone who has vacant land, to appeal if they disagree with their value.
We do look at the three approaches to value: cost, market and income. So, if there is information that we don’t have, that we need to know about a property, please let us know. A lot of times, commercial property owners will hire a class agent to represent them in appeals.
I always encourage property owners to work with the assessor at assessor level appeals first, before they do that because there is a cost associated with working with an agent. Every agent structures their fees a little differently. But if we can work it out at our level, that’s better for the property owner and will save them money. What that looks like is, if this is not an owner-occupied building, then bring us your income and expense information and help us really understand what that looks like and what we should consider. If the building is older and the expenses are much higher than normal, we need to be able to understand what that looks like for that property owner.
Matt: So on that topic, let’s say a building is owned by an owner-user and they were operating out of that building for X amount of years and they did improvements one time when they purchased it and then say 5 years down the road they vacate, but then lease it back out to another operator as the true landlord, are you still applying assessments to those improvements every two years, or is that a one-time thing?
Let’s say improvements were done back in 2013 and let’s say it was 1 Million dollars in improvements, and you would assess that 2 years later? Then next go around, are you still applying that if there has been no work done?
Lisa: I want to make sure we are talking about the same thing, because when you are talking about improvements, are you talking about like having the roof replaced or?
Matt: No, I’m talking more office build out. So, like a blank shell, then completely built out with 12 private offices and a break room, etc.
Lisa: Something like that would just become simply a part of the property characteristics where we agree or acknowledge there is finish in a particular square footage of the property.
Mike: So, it becomes part of the property going forward.
Lisa: Right. So, a residential example is, if you finish your basement, you will always be valued with your finished basement.
What does an owner need to come equipped with, you mentioned income and expense information, is there any other information they need to come with?
Lisa: I always recommend -if there’s something about your property that we may not know about, so it could be condition issues or structural issues, we really do have to take that information into account. A good example is in Douglas County we have the Teletech Building, which is in pretty rough shape and the whole parking lot is buckling and it is a real issue. We must take that into account when we value that property. It’s important information like that. If there are market conditions in that area that create difficulty in marketing properties, that is information that is helpful for us to have.
I always say property owners know their property better than we do because they are there all the time. We may visit a property once or twice in 20 years. It’s important that we acknowledge and respect the property owner’s relationship with their property.
Is there anything else, Lisa, that you think we’re missing here that we should talk about?
Lisa: I think it’s important for property owners to understand how to appeal your property at the assessor level. Different counties are on slightly different schedules. The majority of Metro area counties have adopted what is called the alternate appeal process. Which essentially gives us more time to process the appeal in reappraisal years, because our numbers are much, much higher than in intervene years.
We will be providing notices of determination in Douglas County in mid-August. Arapaho County has not adopted this alternate appeal process so their notices of determination will be mailed June 30th. Their county board of equalization, which is the next level of appeal, begins in July. For us it begins in September. We like doing it this way because it gives us the opportunity to thoroughly review each appeal.
It’s important we give every property owner that diligence on our part. That’s why it’s great when we get information from property owners at this level so we can work with them.
Please don’t misunderstand me, you know there are some good tax agents out there. A business owner knows their business, the whole property tax environment is not their area of expertise. So sometimes, it is worthwhile for them to engage with somebody who is going to handle it for them.
One last question, for those who might not be very familiar with incorporated and unincorporated, what are some of the biggest differences there when it comes to property taxes?
Lisa: in Douglas County, there is not a huge difference. A lot of people think of Highlands Ranch as the big city, when Highlands Ranch is unincorporated. Whereas Lone Tree is incorporated. Some municipalities do levy more in property tax. In Douglas County that is not the case, our municipalities are reliant on sales tax for their revenues, not property tax.
Mike: Super. Well this has been a great learning experience for us and I’m sure for our listeners. We cannot thank you enough, Lisa, for joining us.
If someone would like to contact, you would they do so on the Douglas County website?
Yes, they can contact us through the website, there is an opportunity to email us through the website or they can call us directly.
We have some fantastic public assistance who are very eager to take your call and make sure you get where you need to be. If you need to speak to a commercial appraiser, they are very happy to chat. And work with property owners. It is so important that we provide that customer service.