Posted by Donald Teel – Arizona Commercial

In today’s commercial investment environment, property taxes can be lethal. Many investors are still paying property taxes that are reflective of the market run-up of 2000-2006 and not necessarily on the current valuations of their investments.

The questions are what can you do about inflated tax valuations, where do you turn and more importantly, how can investors challenge property tax values successfully?

Property Tax Analysis. Create an analysis of the assessed value of your property for the previous five years to determine the trend line. The analysis should show the assessed values and compare those with a legitimate Broker Price Opinion (BPO) to show market value trend compared to assess valuation trend. It might look something like the following (Download the FREE sample spreadsheet here).

Assessed Value VS Market Value Sample Analysis - Sample of Presentation for Tax Challenge

Commercial BPO. Secure a commercial property broker price opinion (BPO) for your property to help determine the market value trend line. Arizona Commercial can do this for you for a nominal fee. The report includes photos, recorded sales values, spreadsheet analysis and conclusion.

The BPO must include such detail as location within the market, property style, age, square footage, lot size, parking, vacancy/occupancy rates, number of leasable office/areas, and other issues that demonstrate the empirical value of the property.

Appraisal Approach. If the first two suggestions demonstrate that you have a potential tax overcharge, the final requirement may be to secure a full appraisal with detailed analysis of comparable properties. Appraisals are expensive and should only be used if the economics of the situation warrant such a measure. However, when push comes to shove, a certified appraisal will carry more weight than a commercial BPO.

Challenge Process and Procedure. States have specific procedures for challenging property taxes and the process must be respected in order to be successful.

The process will include forms, time frames and details that must be completed prior to consideration of a claim. Following these procedures and time limitations will be a critical factor. Most likely you will be required to pay the taxes while challenging their validity and if taxes are not paid in a timely manner, other negative consequences can occur in the form of interest and penalties and in severe cases, assessors may sell the delinquent taxes with a lien or even sell the property after a specified time.

Appealing a tax bill is not easy and may include several layers of review including a hearing for the property owner and even judicial recourse. Ask your County Assessor’s office for a copy of their appeal process.

Failure, Refusal or Inability to Pay Taxes. It is unlikely that a refusal to pay property taxes pending the outcome of a challenge will carry any weight and may further exacerbate the problem by creating a hostile situation.

Philosophical, political or principles of conscience are irrelevant to the process. However, in some cases, hardship may be considered as a factor in when and how the taxes are to be paid. Hardship exemptions are difficult when it comes to commercial property and typically are more successful when the property is a primary residence.

Generally speaking if an owner cannot pay the commercial real estate property taxes that owner should immediately communicate with the County Assessor’s office where the property is located and seek advice.

If a challenge is in order, owners may want to contact a competent lawyer with experience in real estate property tax law.

Declining Commercial Values. Most property types have declined in value and this naturally leads to an examination of all expenses related to market value and the cost of the property, including property taxes.

Declining values are now creating a backlog of challenges and yes, it can get very nasty, as some governments are deliberately protracting the challenges and the court cases to their advantage.

There is no doubt about it, however, that some owners are still paying taxes based on unsupportable valuations from previous years. Despite the declines, property taxes have continued to climb in far too many markets. As an example of the lagging, for the first time in 12 years, property taxes in some areas of Los Angeles County declined up to 15% while others increased.

Donald Teel

Seldom can it be said that the market is both a ‘buyers’ and a ’seller’ market simultaneously. But this seems the case as we prepare to enter the second half of the 2009 commercial market.

Pinching down on Buyers is the absence of simplified capital lending, something necessary to their investment strategies. Sellers are experiencing what I call “refi shock” as banks tighten their rules for lending qualification in the wake of declining property values.

The conundrum is realized as buyers and sellers are forced to work in a market that favors both. The conundrum is one of uniquely creative transaction partnerships, where neither the buyer nor the seller can pop the cork on a Champaign bottle and light-up a victory cigar.

The Buyer vs. Seller Conundrum

This paradox of market realities or, clash of interests, is actually a moment of investment opportunities where banks can become the third party servants to buyers and sellers.

Cooperative positioning of the principals in a commercial investment transaction actually empowers the buyer and seller, making the market slave to both.

We are entering a new commercial reality, where winners and losers are not created so much as “beneficial parties” are created. It is time for the transaction principals to craft, not a winner take all deal, but a “partnership reality” that is necessary for the economics of a transaction to mutually benefit both in a way that creates market survivability.

I’m still seeing “attitude” with principals and this mental swagger is killing transactions, daily.

Our Brave New Weird

Ours is an industry high on client fiduciary and rightly so. Representing clients is what commercial real estate brokers do; it’s our core and the nucleus of transaction integrity.

What happens, however, when buyer and seller brokers, minimize the unnecessary and counter-productive posturing and gesturing seen in transaction negotiations? Nothing! Unless, of course, the negative energy of “I am right, you are wrong” is replaced with a new paradigm for cooperative transaction creation.

Sellers are going to increasingly find themselves on a razor edge as they face property turnover and reinvestment. Therefore, they must give and not just get.

On the other hand, buyers are facing a financing reality where they are going to not only need the good will of sellers, but perhaps some of the seller’s equity to convince lenders to lend.

I’m seeing a greater level of hostility born of a sense of market frustration that is counter productive to principals and brokers. As tensions rise in a frustrated market, the need for admission that we are indeed in both a buyer’s market and a seller’s market; they are becoming one-in-the-same.

Email Donald Teel – Senior Associate, Arizona Commercial for answers to your investment questions or, if you prefer, call him, toll free at 877-777-9100.

President Barack Obama

The Obama Administration has been funneling billions of dollars into lending institutions and dedicating billions more to the housing industry and its hoped-for recovery. This begs the question, is the President ignoring the problems now surfacing in the commercial property sector of the economy?

The short answer is yes. The longer and more complicated explanation may lie in understanding the fundamentals of the lending and insurance industries as they are the prime note holders and owners of much of the nation’s commercial real estate.

Although commercial property value declines are now underway in almost every property category, lending institutions may be free to use TARP and other funds to shore up the ailing commercial market.

A high percentage of commercial real estate owners (estimates are between 40% and 80%) will find refinancing difficult from 2009 through 2012 as 3 and 5 year note calls begin to kick-in and owners face a new set of qualifying requirements designed to reduce lender risks in commercial property lending.

There appears to be more creative liquidation and seller financing emerging in the market as owners face the reality of a shrinking market and the pressure to create cash flow.

Creative financing has been and will continue to be a major factor in structuring transactions during the commercial real estate recovery. We have been recommending that owners who can take on the roll of lender do so as this leverage enables competitive pricing and can produce healthy yields over the long haul.

It will be some time before we have any definitive indicators that the President’s overall approach to the economy has helped or harmed the commercial real estate sector.

This post written by and sponsored by Donald Teel, a Commercial Real Estate Specialist in Prescott, Arizona affiliated with Arizona Commercial. Donald can be reached by calling him toll free at 1-877-777-9100.

Allan Woodruff, CCIM

We’ve all been hearing  and reading “gloom and doom” from the media.

But we know from history that turning points come while the masses are still moaning about how bad things are.

So are we at a turning point? Are we close enough to jump back into the market?

Here are a few facts investors can consider in refining their commercial real estate investment strategies on either the buy or sell side:

1. The deleveraging process will take more time as we work through the process of restoring sanity to private and corporate finances. We’ve lived through a period of very high leverage which must be unwound.  Habits and attitudes must change as investors take a more realistic view on risk, increase savings and reduce spending.
2. Yes, there are economic “green shoots” being seen this spring. Witness the stock market rally and an upturn in existing single-family residential (SFR) real estate sales in February. Consumer Confidence rose slightly from March to April, according to the Conference Board. SFR affordability has reached a multi-year high due to collapsed prices and interest rates at their lowest levels since about 1971. The “transition point” (the inflection point at which prices fall slower than they had been) seems to have occurred in the SFR market, so there is evidence that SFR prices will find a bottom soon.  Prices are typically at early-2004 levels or lower.
3. In the commercial real estate, cap rates (net operating income divided by sales price) have been moving up. This has increased downward pressure on prices, and is a reflection of the higher vacancy factors and lower rents that many owners have encountered. “Commercial follows rooftops”, and the commercial market still has more workout time.
4. Multi-family has seen the largest increase in cap rates. This sector had previously held up best, while retail, office and other commercial sectors were impacted by the poor economy. 
5. Increasing commercial foreclosures will exert additional price pressure on all commercial sectors.
6. Markets tend to overshoot on the way up, and again on the way down. This provides investors a great opportunity to buy when “there’s blood in the streets” if they watch key metrics and turning points.

See the attached article, “Here Comes the Sun: The Recession May Be Over”, by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co, Inc.

In summary, commercial owners may still benefit from selling now, and re-entering the market at lower prices later. Buyers should be careful… make sure the project is solid, with conservative assumptions. The great financing now available can help make the project work.

Our REO Service is a great way for investors to buy at very attractive prices. If you are seeking commercial investment advice, please email me or, if you prefer, you may call me at (928) 830-2599.

What is the state of the commercial foreclosure market?

Will we see mortgage defaults in the commercial sector? Will the degree of defaults parallel the residential market collapse.

Sand State Foreclosures. Nevada, Arizona, California and Florida, the so-called “sand states” are experiencing the beginning of what can only be described as a plummet (my word).

According to the Las Vegas Sun, April 2, 2009, 25% of Las Vegas commercial real estate is troubled and Commercial properties valued at a whopping $7.885 billion are in trouble in Las Vegas as casinos struggle under the weight of the recession and office buildings and shopping malls lose or are unable to find tenants.

This phenomenon is being replicated in each of the “Sand States” as the federal government’s promised mortgage financing relief continues to be illusive to commercial investors.

On a National Scale: Getting Ugly. “We haven’t yet seen the worst of the effects of the recession on the commercial markets,” said Stuart Saft, a partner at the law firm of Dewey & Leboeuf LLP in New York, who specializes in real estate. “That’s still to come.”

Indeed, according to Real Capital Analytics, “Delinquent loans increased by 43% in the first three month of this year to $US65.9 billion, according to data from New York-based research firm Real Capital Analytics Inc. That’s up from $US46 billion at the end of 2008.”

Worse yet, the decline in commercial real estate values is now at 30% since peaking in 2007 and predicted future declines may add another reduction of 11% in 2009.

According to Deutsche Bank AG’s report on March 25, 2009, the number of commercial repossessions by banks will spike in the next 18 months.

View the full article on WA Today: Defaults Rise, Worst Yet To Come For Commercial Property

The Los Angeles metropolitan area has about $US7.5 billion distressed properties, a 168% jump from December. Las Vegas had a 54% increase, to $US6.1 billion, Real Capital said.

Metropolitan areas with more than $US1 billion of commercial properties in distress more than doubled to 11 from five. Philadelphia, Chicago, San Francisco, Austin and Houston, Texas, and Detroit joined New York, Las Vegas, Miami, Phoenix and Los Angeles.

Manhattan distressed commercial real estate has risen by 36% this year to $US4.2 billion, according to Real Capital.

Real Capital Analytics (RCA) tracks distressed commercial properties and their disposition via its Trouble Asset Radar and reporting tool.

A search of RCA troubled assets for the Southwest United States yielded the following results:

US Southwest U.S. Distressed Commercial Assets











There is no question about the decline of commercial real estate values and with such declines, troubled assets, foreclosures and commercial REOs will become a contemporary reality.

My Advice. Investors-owners should be agressively pursuing alternative financing where needed and/or, releasing properties through strategic sales where seller financing is allowable.

On a positive note here are the most active commercial market in the US according to RCA.