COVID-19’s Impact on the Fortunes and Future Course of Commercial Real Estate in the U.S. Market

Steve Katz  0:09
Hello again and welcome to the Hilco Global Smarter Perspective podcast series. I’m your host Steve Katz. Today we’re speaking with Frank Lima, Managing Director of Hilco’s Property Tax Advisory practice about the profound impact that COVID-19 is having on the fortunes and future course of commercial real estate in the U.S. market. Just as a little quick background, Frank and his team work with clients to achieve assessed value reductions on their owned or leased assets in key taxing jurisdictions across the U.S. Quite impressively over the past three years, Hilco has realized an average tax reduction on behalf of its clients of 22.25%. With that said, welcome to the podcast, Frank.

Frank Lima  0:50
Hi, Steve. Great to be here.

Steve Katz  0:52
Well, we’re glad you were able to join us today so thanks for being on. Frank our discussion today is focused on this limited window of time, during which property owners now have the potential to achieve relief from their assessed valuations via the appeal process, right? Can you take us through what you’re seeing in the market that has created this opportunity at this particular time?

Frank Lima  1:14
Sure, Steve. Most markets be it key markets or the small towns have been impacted by the national and state mandates of lockdowns. Small commercial businesses, like gyms, hair salons, restaurants, or mom and pop dry cleaners have been impacted by this. This has increased vacancies, delinquencies, tenants turning leases back to landlords, thus increasing vacancies. On the mall platform, tenants closed too could result in what is known as a kick-out clause in the big regional malls. If a mall occupancy drops below a certain threshold, tenants can leave without breaching their leases. This domino effect starts as stores start closing, traffic slows, and that impacts surrounding assets. As we approach 2021 reassessment cycling starts around the beginning of the year. Now we will be reviewing our clients’ assets for their appeal opportunities.

Steve Katz  2:17
Okay, so what’s the core argument in favor of property tax relief? For example, what are assessors going to be looking at when a property owner decides to appeal for relief in 2021?

Frank Lima  2:30
It’s kind of a loaded question. Assessors typically rely on a transaction. However, as they look across the horizon, and they see a sea of vacancies, we believe they’re going to have to resort to some type of adjustments. Typically, the assessors look at the operating income and expenses, your operating statements, your revenue versus expenses, be it insurance, employment, and the like. And as the NOI the income less the expenses result in a net operating income NOI. As the client revenues lower NOIs, they may have to increase one of the adjustments at the top line, which is the vacancy in collection allowances on the income and expenses and/or result in higher cap rates. So there’s going to be a myriad of things that they’re going to have to kind of focus on in this very particular environment again, as vacancy increases, as they see tenants turning back leases to the landlords or a number of sales occurring.

Steve Katz  3:37
Okay, you’re right, that was a loaded question. Good answer very, very complete so thanks for that. And I know when we’re talking about this, we’re not just talking about retail business owners here. Right? So who specifically should be taking this step? And how involved is it to do it the right way in order to achieve the best result?

Frank Lima  3:57
Well, there’s an unknown statistic that doesn’t seem to have changed in the number of years I’ve been in this business. The typical property owner that appeals the real estate taxes is about 25%. That’s on the residential side and the commercial side. So the reason this statistic doesn’t seem to move much is the tax appeals can get complicated and cumbersome and so a lot of property owners, even a small residential, you’ll want to appeal your house, they kind of stay away from this because they think, I don’t have to hire a lawyer, I don’t have to get involved, etc. The tax thing gets complicated because there’s the letters of authorization, evidence, you have to provide this evidence and you don’t want to provide too much information. A lot of our clients will call me and say, “Frank, I got this from the assessor do I respond to it?” I say, “No, just give it to us.” So there’s a lot of times the assessors try to trick you into giving them too much information. Like I said, a lot of property owners kind of veer away from this. This impacts not only small commercial properties but warehouses, apartments, small and large manufacturing. One of the assets that we’ve seen to get some legs under recently are paper mills. And this is kind of impacted because of the newspaper business or you would think paper mills would be on an increase with all the corrugated boxes that are going out. But there’s two different types of paper mills, one that produces the corrugated boxes and the other that produces just paper. Think about magazines or ads in newspapers, that’s all kind of on a decrease, because everybody is using the internet or getting ads via their social media. The other area maybe oil and gas. Oil and gas has really been driven down lately as a result of people not using their cars not driving as much, landlords of community centers, warehouse distribution, and the like.

Steve Katz  5:54
So Frank, what kind of timeframe are we talking about to be able to do this right? If businesses and property owners aren’t already moving forward on it, is it too late? And is it something that can be handled by those businesses internally? Or does it really necessitate going to an outside firm to achieve the best result from a relief perspective?

Frank Lima  6:12
Good question, Steve. The appeal one though, is typically 30 to 45 days from when the assessment notices are issued by the assessor or they publish their values or notices in the newspaper. We’d like to have clients’ information 30 days in advance of that deadline to review the leases, look at supporting evidence, market evidence, to get all the authorizations and to file the appeals. The appeal deadlines are spread throughout the year with some bottlenecks. The time for us to start reviewing this is now and review the process and try to stay ahead of it. Some firms like to do this internally and they sometimes provide the assessor too much information and the assessors are going to request them to send this information. But having the knowledge and experience that we have, we know what we want to send them what we don’t want to send to put us at a disadvantage. We look at actual leases, we look at actual transactions, and this information based on how the assessors of the properties on a per square foot basis is the nucleus of how we’re going to approach our appeals. A lot of times we’ll get a call from a client that says, “Hey, I just got this notice and my taxes are going up and Frank, can you help me?” I say, “Well, we’d love to but the appeal deadline was Friday and this is Monday, and we missed the window.”  Or they’ll call me on Monday and the appeal deadline is Friday. So we really like to line this all up with our clients. We have a tax calendar which we review all of our clients’ assets to plan this adequately. Right now for example, we’re working on some appeals in South Carolina. The appeal deadline is this Friday, we’ve been working on this for the last 30 or so days, the values just became available to us like the middle of December. So we’re doing our research in order to have this in front of us before and to meet the deadlines and then we’ll have a hearing and try to negotiate a settlement for our clients.

Steve Katz  8:14
Well, Frank, clearly doing it right and making it happen within the limited window of time that’s presented itself is absolutely essential, since as we know all too well. Owners absolutely need the benefits of that relief right now perhaps more than ever before. So for those of you listening today who are owners of a restaurant or bar a store, small industrial or manufacturing business, or are a landlord to those and other businesses, it certainly seems that reaching out to Frank and his property tax team at Hilco to have a conversation would be in your best interest right now. With that in mind, Frank’s email is flima@hilcoglobal.com that’s flima@hilcoglobal.com. Frank, thanks once again for joining us.

Frank Lima  8:54
Absolutely. Thanks for letting me share this important information with you and your listeners.

Steve Katz  8:59
Absolutely. And listeners we hope that today’s Hilco Global Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful in moving forward. Until next time for Hilco Global, I’m Steve Katz.