Assessments, Levies, and their Negative Impact on Operating Income

Assessments, Levies, and their Negative Impact on Operating Income


Newsletter – June 2023

“How has the recent property tax increase in Colorado negatively impacted my property’s value?” This is a question that will be asked by many commercial real estate owners in the coming days and weeks. Let’s take a dive into the effects of Colorado’s record high reassessment rates and discover what it will do to a building’s tax bill, NOI, and cap rate value.

In the State of Colorado, property taxes are reassessed every two years. Your commercial property tax bill is determined by three factors: the actual value, the assessed value, and the mill levy.

June Newsletter Assessment Breakdown

Your actual value is determined by comparable sales of like property in the last two years (July 1st, 2020-June 30th, 2022). Once determined, the Actual Value is multiplied by the tax assessment rate, which for commercial real estate in Colorado is now 27%. Finally, your assessed value is multiplied by the area’s mill levy which is composed of mills from schools, county roads, and other local taxable responsibilities.

June graph

One of the largest risks in Colorado commercial real estate this year is the biannual property tax reassessment which will reflect an increase of between 30% and 60%, the largest tax increase in Colorado history.

Let’s look at a hypothetical example to see how this would impact the value of your commercial real estate. Assume a property’s real value is $5,000,000.00. If we multiply this by the tax rate of 27%, we get $1,350,000.00 or the Assessed Value. Let us now assume the mill levy in the area is 114.632. If we multiply the Assessed Value by the mill levy (divided by 1000 for the purpose of mathematical continuity) we get the estimated tax bill for this property, $154,753.00. This is a large bill, but a reasonable case study for our purposes. Now let us assume the property value is being reassessed based on a transaction that took place between July 1st 2020-June 30th 2022, or the analysis period. The sale of this property took place in 2022, a year that saw some of the highest average sale prices in the history of commercial real estate. This “$5,000,000.00” building sold for $6,750,000.00 in the analysis period. Now the state wants to reassess the property at this new Actual Value. I’ll let you run the math! Your tax bill has gone from $155K to $209K! A 34.7% increase in the Actual Value will result in a 34.7% increase in the final tax number, all else remaining equal. The case study we just ran through represents the low end of a large range of property tax increases that can be expected in 2023.

Now let’s explore what this could mean for the value of your property. If you have a NNN lease structure, these property tax increases would be reimbursable by the tenants (assuming there isn’t language in the lease capping the possible increase to expenses each year). The danger here lies in the tenant’s ability to withstand the large increase in their monthly additional rent. With the economy already in a dip, increasing expense numbers will make Gross and Modified Gross leases the first thing that tenants look for. If the building has a gross or modified gross lease structure, the increase in expenses will come directly out of NOI. If there is a $54K decrease on a $500K NOI, then at a 6 CAP the value drops from $8.333M to $7.433M. The value of your building has dropped almost $1,000,000.00, or 10.80%! The low-end reassessment in 2023 changes the viability of the investment, and seriously alters the frontier of the commercial real estate market.

Taking a look at the higher end of property tax increases, the math gets stickier still. Taking the same $5M building, and assuming a reassessment at $8M (a 60% increase), you see an increase in the initial tax bill of $154K to $246K. This nearly $100,000 increase in the building’s expenses correlates to a change in value from the initial $8.333M to $6.8M, or 18.40%! This $1.5M loss in value is hypothetical here, but a very real problem for so many property owners across Colorado. So what do you do? The best plan of attack is a property tax protest. Approach the county and argue with comparable sales and building NOI that they have overvalued your investment. Otherwise, you will need to wait till sale prices increase again and absorb the loss as best you can. Creativity will be required to boost the building’s NOI. While overcoming a large loss to your income in this down market may seem impossible, in the words of Nelson Mandela, “It always seems impossible until it’s done.” Good luck out there!

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NavPoint Real Estate Group (“Broker“) has been retained as the exclusive Broker regarding the sale of the property located at the address noted below.

To receive an Offering Memorandum (“Offering Memorandum“) please read this Confidentiality Agreement and agree to the terms. The details and information contained within the Offering Memorandum were obtained from sources deemed to be reliable. Verification of the information contained within the Offering Memorandum are the sole responsibility of the Potential Purchaser. No representation is made to the accuracy of the information by Seller or Broker. THIS AGREEMENT is made and entered into by and between NavPoint Real Estate Group and “Potential Purchaser” and shall become effective when executed by Potential Purchaser or Potential Purchasers Broker.

A. Commencing with discussions held between their respective representatives the parties have pursued and expect to continue to pursue discussions (the Discussions) relating to the potential sale of:

In the course of these discussions, Seller has disclosed to Potential Purchaser and may continue to disclose to Potential Purchaser certain information of proprietary and confidential nature (“Confidential Information”).

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  1. Potential Purchaser shall maintain the Confidential Information in strictest confidence and shall not disclose to any third party any Confidential Information received from the other party. In addition, Potential Purchaser shall ensure that its officers, employees and agents likewise maintain the Seller’s Confidential Information in strictest confidence and that such persons do not disclose such Confidential Information to any other party. Potential Purchaser shall not have the right to use, duplicate, reproduce, copy, distribute or disseminate Confidential Information except for purpose of the discussions and negotiations as needed.
  2. Potential Purchaser agrees to limit access to Confidential Information received from the Seller to its own officers and employees on the absolute need-to-know basis solely for the purpose of the Discussions, and to use the same degree of care in reserving the secrecy of the Confidential Information furnished by the Seller and/or Broker as it uses in preserving the secrecy of its own Confidential Information.
  3. Notwithstanding the conclusion or termination of the Discussions, Potential Purchaser shall continue to fulfill its obligations hereunder for a period of one (1) year from the date of disclosure. Upon termination of the Discussions, all Confidential Information, including all forms of Documentation shall be returned to the Broker, including any copies or adaptations made by the receiving party.
  4. The obligation of Potential Purchaser under Paragraphs 1 and 2 above shall not apply or shall cease to apply to any information which Potential Purchaser can demonstrate by reasonable documentary proof- (a) to have been in the possession of Potential Purchaser at the time it was first disclosed by the Seller and/or Broker; (b) was in the public domain at the time it was disclosed to Potential Purchaser; (c) entered the public domain through sources independent of Potential Purchaser and through no fault of Potential Purchaser; (d) was lawfully obtained by Potential Purchaser from a third party who is free to disclose such information to Potential Purchaser; (e) to have been at any time developed by Potential Purchaser independently of any disclosure from the Seller; or (f) has been in the possession of Potential Purchaser for more than five (5) years.
  5. Potential Purchaser shall not have any right to register any copyright, trademark, service mark or corporate name based upon Confidential Information or otherwise register or claim any right to use any Confidential Information disclosed to it by the Seller without the express written consent of Seller and Broker. Nothing herein, and no disclosure of Confidential Information or Documentation pursuant hereto, shall be deemed a grant to Potential Purchaser, whether by implication, estoppels or otherwise, of any right or license under any industrial property right of the Seller.
  6. The Discussions shall continue until the date on which an Agreement shall have been concluded or the date on which either party shall have given written notice to the other of termination of the Discussions. All obligations of the parties hereunder shall survive any termination of the Discussions.
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  8. This Agreement shall be governed by, and interpreted and construed in accordance with, the laws of the State of Colorado, USA.

For purposes of creating a binding contract in determining the rights and obligations under such contract in any court of law, the parties acknowledge that a signature reproduced by either digital signature, electronic signature, facsimile or photocopy shall have the same force and effect as an original signature and that the original and any such copies shall be deemed one and the same document. In the event this Non-Disclosure Agreement is submitted electronically, this agreement is provided under the Uniform Electronic Transactions Act – Col. Rev. Stat. §§ 24-71.3-101 et seq. By submitting this agreement, you are confirming your agreement to submit this Non-Disclosure Agreement electronically, and your indication of agreement, along with information provided, will have the same force and affect as if this agreement was submitted manually and your manual signature was provided. You should retain a copy of this agreement for your records.

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