There is a tea party underway. But it doesn’t involve a particular political party. It involves a revolt against real estate taxes levied by local taxing authorities against real estate owned by companies with national name recognition like Walgreen’s, General Electric, and Brigestone. These companies contend that they’re being taxed on their hard earned reputation – goodwill. It’s no secret among real estate professionals that the lease rates for buildings occupied by nationally franchised tenants are well above rates of a typical tenant who lacks name recognition. As a result, buildings they occupy sell for a premium price, resulting in higher real estate taxes.
Their argument is that, if the building were occupied by a lesser well-known tenant (and leased at a market rate), it would sell for a much lower price and be taxed at a much lower rate. Therefore, the increased taxes must be based on something other than the value of the physical components that comprise the real estate. So how does their contention square with valuation theory? Are they really being over-taxed? The answer to that question depends on what is being taxed. The term “real estate” refers to the physical components (i.e., the land and everything attached to it) whereas the term “real property” refers to all the rights that are associated with the real estate. Although many people use these terms interchangeably, there is an important distinction between the two concepts. Every first year real estate student is schooled on the difference when taught the bundle of rights theory.
As an appraiser, I am employed to appraise rights related to property. These rights most often consist of the fee simple estate (complete ownership and the value sought in most municipalities for taxation purposes), the leasehold estate (the right to occupy the property), or the leased fee estate (the right to receive lease income generated by the property). In the case of a leased fee estate, the right to receive income from a AAA rated company would be much more valuable than the right to receive income from a company with no brand recognition, say Larry’s Pharmaceuticals. Given these circumstances, the physical components of the property are incidental to the overall transaction price – the price that often gets recorded on the deed (in states that do that sorta thing) and the value on which they are being taxed, despite their obligation to assess taxes based on the fee simple value.
So here’s the rub. The transaction price, the price a buyer is willing to pay for the right to receive income from a AAA rated tenant is recorded on the deed at the court house. This premium price is then taxed a rate that reflects the right to receive income from a AAA rated tenant. I’m just asking. But is this fair?
Another problem lies in the method used by tax assessors to compute value. Most companies with a national franchise own buildings with a highly unique design. The cost to construct such a building typically includes items that would be worthless to any other company. But the method used by tax assessors to calculate taxes is based on the cost to construct. I’m not sure how much those mile-high McDonald’s signs along the interstate cost to build but you can rest assured that it would be worthless to Joe’s Burger Barn.
Sadly, the defense by local taxing authorities and politicians in rejecting the pleas for tax relief by these companies is that it would increase the tax burden of other property owners in the area or reduce funding to one of their darling (and politically sensitive) causes such as education. Seriously? That’s your defense?
When you reach the point that there is no legitimate argument left, forcing you to appeal to the desires of the mob, it’s time to acknowledge your sin and repent in sackcloth and ashes. Just sayin’.