Hall: Property taxation starts with establishing value

In a letter reflecting the newly formed Constitution and its permanency, Ben Franklin wrote, among other things, that “in this world nothing can be said to be certain, except death and taxes.” You’ve no doubt heard that ditty before, but it is certainly befitting during an election year. While most people wouldn’t argue the importance of taxes to support our nation’s infrastructure, the rate, sources, and uses of these tax revenues have been disputed for centuries.

In Colorado, property taxes have received a lot of press lately. Property taxes impact every property owner and in turn every tenant. In our current market, real estate taxes are having a profound impact on the affordability of commercial property in particular and also commercial leasing rates. It’s important to understand where these rates are coming from, and how they are calculated.

Businesses pay property taxes on real estate the same way individuals pay taxes for their homes, depending on the assessed value of that owned property. So, how does the county calculate the value of the property? Will property taxes be affected by the current conditions of the market? These are all questions that have been on business and property owners’ minds.

Colorado property tax law requires assessors to conduct countywide reappraisals on all real property on a two-year cycle in the odd years with the appraisal date being six months earlier. Properties are assessed according to their condition as of Jan. 1 of each year. The value assigned to properties in 2021 will be based on the market values as of Jan. 1, 2019, to June 30, 2020. The Larimer County Assessor is required to gather information and confirm sales within 18-months ending on June 30 of the year prior.

When assessing property values, Colorado statutes require the assessor to use the cost, market, and income approaches to value.

Three approaches to value:

Sales Comparison Approach (Market Data Approach) compares the subject property to similar properties within a designated time. The comparable sales are then adjusted to match the subject property for time (date of sale), location, square footage and other differences in physical characteristics between the sold property (comparable) and subject property.

The Cost Approach is based on the principle of substitution. This approach consists of five stages, (1) estimate the value of the land, (2) estimate the current cost of construction and improvements, (3) estimate the amount of accrued depreciation (loss in value for any reason), (4) deduct accrued depreciation from the construction cost, (5) add the estimated land value to the depreciation cost. Complete all five steps to arrive at the total property value.

Income Approach to value is based on the present value of the right to future income. This approach assumes that the income generated by the property will determine the property’s value. The income approach is not used for residential properties but instead commonly used for income generating properties such as an apartment complex or office building.

What does all of this mean for 2021 valuations? In early 2021, Colorado assessors will be working hard to complete the 2021 reappraisal. Assessors are bound by state law to consider the income capitalization approach to valuing commercial property. The law established June 30, 2020, as the date for the reappraisal and specifies that 2019-2020 real estate rent levels, vacancy levels, operating expenses and capitalization rates be used in determining the value. The assessors need your help in collecting this data so that 2021 property values are indicative of the market. 

Has the pandemic caused enough disaster to trigger a relief on property taxes? Although COVID has not caused any physical damage to real estate, the impact of COVID on future income has been dramatically affected. If restaurants are at 60% capacity limits and their sales are 60% of what they were, pre-COVID, you had better bet that this will impact future income for property owners. I encourage you to reach out to your assessor and provide the data needed to understand the impact of the pandemic on commercial real estate.

Tom Hall is affiliated with Waypoint Real Estate in Fort Collins.