OP-ED- Equity in Property Taxes

OP-EDEquity in property taxes
Todd Clarke CCIM

The Albuqueruqe Journal editorial titled “Add Equity to State’s CAP on Property Taxes” dated January 23, 2009 contains only part of the information needed to make an informed decision about making changes to the NM property tax system.

As always, there are unintended consequences of any piece of legislation, and in 2000 the desire to protect New Mexico’s most vulnerable citizens, those low income seniors, has ended up protecting some of New Mexico’s largest property owners.

As the editorial indicated, House Bill 366 was enacted into law in 2000, was pushed by the Santa Fe County Assessor to protect long time elderly home owners from rapid increases in values from neighboring sales to out of state buyers. The stealthier part of this legislation was to undo a 30 year ban on the disclosure of real estate sales information. It is important to note that his legislation only impacted the taxable value of the property, not the tax bill (i.e. if the taxable value increased by the cap of 3%, but the mill levy increased 200%, the property owner’s tax bill would more than double).

Until the 2000 law was passed, County Assessors had a difficult time ascertaining “market value” for any given property, as they had a limited pool of comparable sales available to determine values. After the 2000 law, any residential property sold required that an affidavit be collected by the title company at the time of closing, disclosing the sales price of the property. Although the law stipulated five pieces of information be disclosed, some county assessors generated a multipage form that covered a lot more disclosure than the original law intended. The failure to do so allowed the county attorney to pursuing the seller and buyer for fines. The flipside of this legislation prevented the assessor offices from “disclosing” this sales information to the public, with the potential for similar fines and penalties to be applied to offending assessor’s employees. A year after the law was passed; some 80% of the county assessors who participated in an appraisal panel indicated a desire to repeal the law due to ambiguities in wording and the potential to create inequities in values between similar properties.

Those who spoke in favor of the disclosure of sales for residential properties indicated that with 3 to 5% of the housing inventory selling every year, in 15 to 20 years, many residential properties would be finally valued closer to “market value”.

Unfortunately, the potential to increase many “residential properties” is overlooked as evidenced by the fact 85% of the large apartment sales sold in the last couple of years in the three counties that make up the Albuquerque Metro area witnessed no increase in taxable value, and in fact benefit from the 3% cap on property value increases.

Meanwhile, commercial property owners stood on the sidelines, neither enjoying the benefits of the 3% cap on increasing values, nor the downsides of disclosure of property sales hoping that no one realized that many commercial properties are significantly undervalued.

Based on the information maintained in a database by our firm, Cantera Consultants & Advisors Inc. (CCA) believes that on average, most assessors had the value of their county’s portfolio at about 65% of “market value”. Idiosynchroncies in the tax law like the fact that the property tax bill you receive today is based on the value of the property two years prior further distanced the gap between assessors value and market value.

The lack of clear definitions of terms like “market value”, “residential” and “commercial” only allow more ambiguity to creep into the valuation process. For example, a survey performed by CCA in 2008 discovered that of the 33 county assessors in New Mexico 68% of those assessors consider an apartment building residential, while 32% believe they are commercial, and believe it or not, one county assessor thought it might be both. The state constitution and laws that have followed since lack a clear definition of “residential” and commercial is defined as “non-residential”.

Unfortunately, the valuation of your property is just one of several variables that determine your property tax bill – another is the percentage of the property’s value that is used to calculate your net taxable value, which is currently limited in state law to 33.33%, but in previous decades fluctuated widely. In his book, Cowboy in the Round House, former governor Bruce King writes: “In those days (prior to 1970), your tax evaluation fluctuated along with who might be in power. If your political party was in, that was one thing. If not, that was another. Your assessment was strictly up to the tax equalization board, which consisted of the country commissioners, the county assessor, an at-large Democrat, and at-large Republican. If they wanted to assess a building at 10% of its value, that was what they used. If they wanted 50%, that was it. In some counties, the assessments ran all the way up to 90%.” This hardly created an equitable property tax sytem.

The other variables that come into play between the assessor’s valuation of your property and the treasurers invoicing of property taxes include: property type designation ( residential, commercial, agricultural, etc.), the percentage that is used to calculate net taxable, the mill levy, and qualified exemptions for veterans, head of households, low income seniors, etc.

Representative Boitano’s bill to extend the 3-percent cap to all properties only opens the door to even larger abuses of the ambiguities of the law and enshrines higher property tax bills for all participants by decoupling the connection between a property’s true value and its tax bill.

The second bill repealing the 2000 law would restore equity to the valuation process, but would leave low income senior citizens vulnerable to sudden increases in property tax bills. The most transparent place to provide cover for these citizens in the exemption category.

Ideally, if New Mexican’s truly want an equitable property tax system, future debate and legislation should decide if NM is a disclosure or non-disclosure state, clarify the definitions of property categories, provide guidelines for the consistency of the valuation process across all counties and discuss the merits of providing special exemptions for any of its citizens.

Todd Clarke CCIM, has been performing property tax protests for the last 18 years as a consultant at Cantera Consultants & Advisors, Inc. and teaches a NMREC approved course on “Understanding Property Taxes in NM”.

What is a lease worth in the middle of no where?

How much would you pay to lease land that looked like this?
upham2

Not too much I would expect.

You know the old adage in real estate – location, location, location? Well it comes into play here as well.

Although I am a lifelong NM native, and I was born hundred miles due east of Upham, NM I had never heard of the name of this town, until our Governor, Bill Richardson, pushed through an initiative to turn it into Space Port America.

It was reported that earlier this month, the state of NM and Virgin Galatic signed a 20 year lease valued at $50,000,000. According to an article in the New Mexico Business Weekly the payments of the lease are based on the number of times the runway is used, so most likely this is the largest percentage lease every signed in the history of humankind.

KKOB TV Channel 4 reports that the lease is the next stage of what it takes to release state funding of $200M in infrastructure and construction.

So how did this remote location get chosen?

If you take a look at this map,
uphamnm1
you can see that Upham is just over 150 miles south of Albuquerque, and about 30 miles north of Las Cruces and runs along the White Sands Misslie Range. The Range was originally part of the World War II project to develop nuclear weapons, known as the
Manhattan Project
.

This large swath of land was condemned from New Mexican’s to support the war efforts and after the conclusion of the war was made part of the missile range for future testing.

A no fly zone exists over this part of NM (and in fact, a no drive zone as well) which makes this an ideal location to launch rockets into orbit as there is no cross traffic to compete with.

Few locations on the earth today have no-fly zone, so indeed, this location is unique and priceless.

Book Review: Le Deal

Thanks to Anil Krishnamurthy for sending me my holiday read – Le Deal by J. Byrne Murphy.

Le Deal covers a well known American Developer who decided to expand into the European retail market. Le Deal gives great insight into the differences between development in Europe and America, and provides a handful of good laughs and great stores along the way – like this one from page 24:

Alan had his people run all the numbers and draw up the preliminary designs, and then trundled off to see the mayor of Hillsboro, to explain the concept, and to seek his support.

Alan told the mayor how the outlet would create four hundred new jobs, maybe six hundred if the center grew large enough. He estimated that there would be nearly five million dollars in property taxes flowing into his town’s coffers and four million shopping visits per year…

“ So Mr. Glen what do you want from me?” the Mayor asked at the end of the presentation.

“Well, Alan said, I want your support for the project, I’ll need zoning approval and a building permit to get started.”

The Mayor thought for a moment, then asked Alan, “May I see those drawings again?”

And when Alan unrolled the drawings, the mayor took out a pen and signed his name across the top of the first drawing, dated it, and said “Mr. Glen you just got your zoning approval and building permit – let’s get started.”

The whole interview, from beginning to end, had lasted less than an hour.

If you have an interest in how real estate in Europe differs from America, or in the back story on one of this country’s most successful outlet mall developers, I would highly recommended this book!

All referral proceeds from Amazon go to the CCIM Education Foundation.

How to maximize space

The New York Times has an article about a Hong Kong born/based architect who has maximized his 344 square foot studio apartment. Gary Chang has lived in this apartment for the last 32 years and recently spent over $200,000 improving it to by creating 24 different floorplans, uses and spaces.

He does this with moving walls, murphy beds, and hydralics.

It would be an understatement to say this is a cool apartment, in fact, it bares some similarities to Harrison Ford’s apartment in Blade Runner.

hongkongapartment

Are REIT’s the canary in the mine?

As major retailers like CompUsa, Mervyn’s, Linens and Things, Circuit City, fold one after another, leaving vacant spaces in major malls across the country, occupancy rates continue a downward trend, which eventually leads to decreasing rents and values.

Real Estate investors with the most leverage (i.e. the least amount of their own money), will be the hardest hit, but even lower leverage institutions are taking a hammering in their overall valuations.

What’s going on?

It has to do more with the capital markets than the dynamics of the real estate economy. According to a recent Wall Street Journal article, over $530 Billion dollars of loans are coming due in the next 3 years, including $160 Billion in 2009. Real Estate investors that counted on excess liquidity (or even some liquidity) in the marketplace, are now seeing their valuations hammered as the stock market’s perception is that many of these companies will be unwilling to renew their financing.

Some of this country’s largest owners, are
Real Estate Investment Trusts, or REIT’s
are a special type of corporation (that is not double taxed) which allows passive investors to hedge their risk by investing in a large number of markets around the country (thus avoiding having all of their eggs stuck in one city).

As an indication of where Wall Street pessimism in the marketplace, take a look at the stock value of some of the largest and most well known REITS:

AIMco.
stock-aiv

Equity Residential
stock-eqr


General Growth Properties
stock-ggp

ProLogis
stock-pld1

A Co-Star article indicates that REIT’s values have seen decreases of more than 40% and that many of them are likely to run into a liquidity crisis.

It certainly is an interesting time to be in the business – the recent meltdown of the subprime crisis had led to a crisis of trust between lender’s – so much so that the SEC was recently quoted as saying

“The trust and confidence that counterparties require in one another in order to lend, trade, or engage in similar risk-based transactions evaporated to varying degrees for each firm very quickly. What would have been more than sufficient in previous stressful periods was insufficient in more extreme times.”

From a bystander’s viewpoint, it has been interesting to witness the country’s politicians mickey mouse with the free market, then run from the issues, then hold hearings to find blame, and now they believe they can solve it?

Unfortunately, they’ve avoided discussing the root causes of the capital crisis – public policy initiatives to get every American into a home (whether they could afford it or not), government interference in the free market by offering home ownership preferential tax treatment, and a lack of oversight when Wall Street started going bezerk creating complex financial instruments that neither them, the rating agencies, the buyers or the sellers understood.

The original plan for Troubled Assets Relief Program T.A.R.P was to allow lender’s to clear their slate clean of these bad debts, thus opening the market for future financing.

And guess what?

We still don’t understand them, and until we do, no one knows who has the hot potatoes (the bad debts), and until due-diligence is done to uncover those assets, those same lender’s don’t know what to convey to T.A.R.P. and their assets remain frozen as there isn’t market to buy and convey what you can’t quantify.

Unfortunately, the market doesn’t wait for solutions, it just keeps rolling, and its rolling off the precipice if the real estate investors and developers can’t renew their loans on existing, performing, assets.

Right now, solutions are most likely to come from the following arenas:
1. The capital markets start to thaw and we see financing return to the marketplace
2. a seperate financing vehicle is created, possibly under the T.A.R.P. program
3. Lender’s convert their debt positions into equity (which would require government approval).
4. The property owners start to liquidate other holdings (Prologis just announced a large sale of their Asian holdings

Until then? Look for continue decreases in real estate equity and the possibility that the canary may die, before one of these solutions are expedited.

A motto for 2009? “Don’t be Stupid”

Thanks to my good friend, Sam Foster for turning me on to this article in the WSJ. The OP-ED piece by Daniel Henninger highlight’s one of today’s biggest issues for an investor – how to sort through the overwhelming amount of data and capitalize on the fact, while others are swapping cocktail conversation about the fiction.

Daniel goes on to say

“I’m still mesmerized by the virtually uncountable number of intelligent individuals worldwide who were revealed as dumb in 2008. What happened to them? What if mass dumbing down is now the norm?”

The Economist recently ran an online debate about the same issue – is our society getting smarter or dumber over time?

What are you thoughts?

Update to the NAR code of Ethics

The National Association of Realtors recently updated their code of ethics. Major changes involve disclosure of other parties when multiple offers come in… Wikipedia states that Ethical Codes are “The effectiveness of such codes of ethics depends on the extent to which to management supports them with sanctions and rewards. ”

So what do you think – do the Realtor Code of Ethics protect the consumer?

Film Channel relocates from MN to NM

A Copyrighted article from the NM Business Weekly indicates that Albuquerque has landed 100 new jobs and a corporate headquarters for the ReelzChannel.

Gov. Bill Richardson made the announcement today with Stan E. Hubbard, chairman and CEO of ReelzChannel – TV About Movies. ReelzChannel is owned by Hubbard Media Group, which also owns KOB-TV, Channel 4, in Albuquerque.

With this addition, maybe its time for the Hubbard Media group to look at relocating Channel 4 from the back end of the Albuquerque Country Club to the middle of downtown. Doing so would create more vibrancy (think of Good Morning America) around downtown and would free up some valuable land near the Bosque, Kit Carson Park, Zoo/Bio Park for additional residential development.

Suncal goes on the offensive and promotes TIDDs

Suncal, the recent buyer of Westland’s 64,000 acres, originally known as the Atrisco Land grant, has started promoting the benefits of Tax Increment Development Districts or TIDDS as it continues to seek the City’s approval of its development plan.

TIDDS are also in the works for the redevelopment of the Winrock shopping center (named for one of its original developers, Winthrop Rockfeller) and for the Quorum (ABQ Uptown Phase III).