The changes to the District of Columbia’s commercial real property assessment methodology which took effect for tax year 2015 are causing a stir, with some owners seeing 12-15% increases on office building assessments, which came out in March. Under the old approach, DC considered tenancies that had 6 or more years of term remaining. If a lease was rolling within 5 years, assessors considered the market rent for the space, expense escalations, tenant improvements and leasing commissions, vacancy allowance, and capital expenditures. Under the new approach, the District uses a standard market rent by class (although the classification system is somewhat subjective), multiplies by the building square footage, and deducts a standard ratio from income for expenses (typically 26-28%). Tenant structure and capital improvements have no bearing in the new method.
One important thing to note is that there has not been a change in the basic methodology. Buildings have always been assessed based on Fair Market Value. But with a red-hot sales market, building values are now at a peak (despite the leasing market still being only lukewarm). While this is not the largest spike in assessments the market has ever seen, it feels significant because rents are not increasing and tenancies are no longer considered. This means buildings that have significant rollover coming will have a much higher tax bill since tenant improvements and leasing commissions are no longer factored in.
The District of Columbia Building Industry Association issued a letter to Mayor Gray urging the District to reexamine the existing methodology and cautioning that if it is not changed, the District will see significant influx in appeals and long-term economic loss for both the commercial real estate industry and the District of Columbia. The letter also cautions that since tenants bear much of the burden of building taxes, this method may push tenants to relocate to surrounding jurisdictions, causing further harm to the District’s economy. Appeals have already started pouring in, but it remains to be seen whether the District will make an about-face.
By: Nathan Edwards
Contributor: Bethany Schneider, Research Analyst, Cassidy Turley
Email Nathan: Nathan.Edwards@cassidyturley.com
Follow Cassidy Turley on Twitter: @CassidyTurleyRE