4 tips on avoiding property tax sticker shock

Property taxes boil down to a simple equation: “The tax rate is the cost of government over the value of property.”

So said Myer Blank, senior tax manager at Fisk Kart Katz and Regan Ltd. in Chicago. It’s a simple concept, yet one that may throw a wrench into business planning during the next few years. The numerator, the cost of government, probably isn’t going down anytime soon. The denominator, the value of property, has been rising in some areas, but where it’s headed long-term isn’t certain.

Most custom metal fabricators are small businesses, and their commercial property tax bills may be changing, if they haven’t already. As Blank explained, the Great Recession brought with it a tidal shift in the tax burden. Before the recession, rising residential property values helped fund the rising cost of government.

This of course changed after the recession. The balloon burst, and the cash cow of rising home values ended. Government cut expenses where it could, but roads still needed to be maintained, schools funded, and pensions honored.

Somebody has to pay for it all, and in many places that somebody has been businesses. According to Blank, tax incentives granted years ago to lure new businesses to an area sometimes aren’t being renewed, bringing with it higher tax bills.

Since the housing bubble burst, the local tax burden has in many places shifted toward businesses, including metal fabricators.

So what’s a fab shop owner to do? To find out, The FABRICATOR spoke with Blank and his colleague James Regan, a partner at Fisk Kart Katz and Regan Ltd. The two outlined a strategy that may or may not lower a company’s property tax bill. But with the right information, fab shop owners at least can be sure that they’re paying what they should be paying—and no more.

1. Know What Is and Isn’t Taxed.

Property taxes cover the value of the land, building, and nothing else. In financial jargon, it’s a fee simple property tax. Some states may charge personal property taxes, which can include the value of machines and equipment, but these are paid separately and in a different manner.

This means that if, say, a fab shop improves or expands its building, that increased square footage will influence the property tax assessment. Still, this has to be a structural expansion or improvement; a new machine isn’t real estate but instead an incorporated company’s “personal property” and (if a tax district has personal property taxes) should be taxed separately as such.

What if that same owner sells the shop for $2 million? That price covers not only the building, land, and equipment, but its brands, product lines, and reputation. In other words, it’s the value of the entire business. The value of the land and building—the only value that counts in a property tax valuation—is usually far less.

The concept sounds straightforward, but government records of certain financial transactions can confuse matters. Consider a business owner who uses a financing mechanism like a sale leaseback. Say the owner sells the business to another entity for $20 million, and the new owner then leases it back. It’s a common transaction for owners who don’t want the burden of owning a property. The business owner now simply pays monthly rent. But again, this $20 million entails not just the value of the land and building, but also the intangible value of the business.

“The purchase price of a sale leaseback does not represent the value of a property at a given point in time. Rather, it represents the potential income over time,” Blank said, adding that sometimes the tax assessor may misinterpret the record of sale and, as a result, overvalue the property.

“Even though government records show the property being sold for $20 million, that doesn’t represent the value of the property for tax purposes,” Regan said. “All this may need to be explained to the assessor, because he doesn’t know the conditions under which the transaction took place.” That $20 million represents the leased value of the business, not the fee simple interest in the property—again, just the value of the buildings and land.

Tax rules of course differ from state to state. In some states commercial properties are taxed at a different rate from residential properties. Those rates are central to tax incentive negotiations when businesses consider relocation or reinvestment. As Blank explained, many businesses in the early 2000s were incentivized to open shop in Illinois by being offered the lower residential tax rate. Those incentives are expiring and sometimes not being renewed. This again, he said, makes a solid property tax strategy all the more important.

This includes knowing the available property tax credits, adjustments, or other incentives. For instance, Cook County, Ill., has what’s known as a vacancy adjustment, which lowers the tax bill for vacant plants and other empty buildings.

2. Talk to Your Assessment Officials.

The more your assessment officials know about how your business works, the better. “Every year before the [assessment] appeals process opens, there’s what’s known as an attorney meeting,” Blank said, “where assessment officials lay out what they’re looking for and what they’re going to do. In recent discussions [in the Chicago area], many have been saying, ‘We want to understand your business.’ They want to tax fairly.”

Knowing how a business works helps governments know what can be taxed and what can’t. For instance, a manufacturer with a lot of expensive equipment and a high-value product line may have a very high business value, but that doesn’t reflect the value of the real estate.

Again, sources emphasized that this doesn’t guarantee a lower tax bill; it simply gives the business property a better chance of being taxed fairly. Say your business expands its existing building to include an addition to house a multimillion-dollar automation investment. The building may look sleek, with sheet handling towers for automated material handling, robotic welding cells, bending automation—the works—but this mechanical magic may not affect the value of the structure, because some of it may be the company’s personal property. Communicating this fact to tax assessment officials, you can ensure your new property tax assessment will be based on only the value of the land and building. Your tax bill still will go up, because your structure is now larger, but only by the proper, fair amount.

But what if you lose a major account, you eventually sell the equipment, and you’re left with a vacant structure? Depending on your locality, you may be entitled to a vacancy adjustment. If the assessor knows what happened and when, he’ll know to apply that adjustment.

3. Make Property Taxes Part of Business Planning.

Say you have major plans for serious expansion, such as a new building, new equipment, and more employees. Sources stressed that before making the move to invest, be sure to consider the property tax implications.

You also need to approach taxing district officials well before you apply for zoning or building permits.

As Blank put it, “Why would a taxing district give a retention tax break to a company that has already indicated its intention to stay by filing for permits?”

4. Appreciate the Value of Economic Development.

As Blank explained, business owners traditionally have negotiated for the best tax treatment. Local governments wanted the tax revenue a business provided, both directly through property taxes and indirectly through employment. When people move to an area for a job, they buy homes, pay taxes, and spend money in the local economy. Businesses, of course, want a better tax rate.

Businesses now want more than a better rate, though; they want a skilled local workforce. Dual-income families have become the norm, which sometimes makes it difficult for people to move to a new area for work, especially if one spouse has to give up a significant paycheck. Any company thinking of expanding in a certain area can’t guarantee that the talent will move to where the job is.

Many businesses, especially those requiring a highly skilled workforce, are working in concert with educators, including community colleges. “We’re seeing community colleges linking up with manufacturers,” Blank said, adding that such cooperation helps “integrate what the company does with the community, so that both the business and community can grow together. We’re really seeing cooperation between government, businesses, and education.”

This cooperation, he said, is about economic development, but such cooperation can have an indirect effect on taxation. Businesses that add stable, well-paying jobs are looked upon as an important piece of the community fabric. This includes both large assembly plants and the dozens or hundreds of suppliers that feed them.

If businesses align with educators to provide a deep talent pool, you have a healthy economic engine. That engine is fueled by both healthy businesses and smart tax policy that funds education and maintains the talent pipeline.

“If a company employs workers who make more money over time, and they have longevity in the workplace, they’ll be able to buy homes, and they’ll do more shopping on Main Street,” Blank said. “That in turn improves the residential tax base.” He added that understanding this multiplier effect can influence how government officials view and tax local businesses.

This kind of big-picture thinking moves tax strategy away from just trying to get the biggest tax breaks and toward community development. Good communities can’t thrive without good employers, and good employers—large or small—can’t grow without good communities.