Valley businesses' property taxes up

Commercial owners may find good reason to appeal

Russ Wiles
The Arizona Republic
Feb. 17, 2007 

Property-valuation notices recently went out in the mail, so it's time for businesses to pull out their calculators.

Owners of commercial properties likely will find the valuation exercise more critical this year than will homeowners.

For one thing, businesses have more ways to challenge an assessment. For another, commercial valuations rose at a higher clip than residential properties over the past year.

"My early read is values are up substantially across the board," said Deron Webb of Wentworth Webb & Postal, a Phoenix firm that helps business clients analyze and challenge assessments.

Maricopa County breaks commercial properties into more than two dozen categories, and nearly all are showing double-digit increases in median assessed values for the 2008 tax year. Those tax bills will take effect in fall 2008, but challenges should be made within 60 days of receiving a property-valuation notice.

"We'll spend this entire year in the appeals process (for 2008)," said Keith Russell, Maricopa County assessor.

For example, median office values rose 18.6 percent, industrial parks 16.8 percent and miscellaneous commercial properties 22 percent. Median values on vacant land, which might or might not be used for commercial purposes, jumped 31.7 percent.

Of the commercial categories, only median agriculture values dropped, reflecting the disappearance of some of the most highly valuable farm parcels rather than any overall trend to lower prices.

"With commercial properties, some things change a lot while others don't change much at all," Russell said.

Median values on single-family homes for 2008 rose about 11 percent, after a 51.8 percent spike during the prior year's valuation.

Given that commercial property taxes are a large cost for many businesses, a challenge could be justified.

"Aside from debt service, property taxes are the highest fixed expenses for many firms," Webb said.

Unlike homeowners, who may challenge a valuation solely on the basis of comparable-home values, businesses have three ways to protest. In addition to comparable market values, they can base an appeal on replacement costs to build or the amount of income a property generates.

Because there are so many properties in Maricopa County, it's possible a valuation could be off base, especially since the Assessor's Office lacks the manpower to inspect each property in person.

"Some assessments don't reflect where you are," said Alan Gillespie, a Phoenix-based vice president for developer McShane Corp. "You could have a building that's 100 percent vacant with an assessment that assumes it's fully leased."

Maricopa County's more than 1.4 million properties include 1.16 million residential and 60,000 commercial parcels, 180,000 pieces of vacant land and 23,000 properties owned by government or other tax-exempt entities.

From that total, roughly 12,000 commercial and residential appeals were filed last year, Russell said. Of those, roughly one-third were not resolved and, consequently, went before the State Board of Equalization. Several hundred challenges went to court.

Last year, businesses and residents got a break when lawmakers and Gov. Janet Napolitano suspended a levy called the state-equalization property tax for three years, providing more than $200 million in annual combined relief for businesses and homeowners.

In 2005, the state agreed to cut the assessment ratio on commercial properties by 0.5 of a percentage point annually over 10 years, dropping the business assessment ratio from 25 to 20 percent by 2015. That compares with a 10 percent assessment ratio on homes.

A bill in the Legislature would permanently eliminate the state-equalization property tax, while another proposal would accelerate the decline in commercial assessments, so that the 20 percent level would be reached by 2011.

Such efforts reflect chronic grumbling among some business owners that property taxes for them are relatively high, with the implication that Arizona is uncompetitive compared with other states in this respect.

In a 2005 study by the Minnesota Taxpayers Association, Arizona had the fourth-highest commercial tax rates compared with homeowner tax rates.

"Property taxes are a cost of doing business and a factor for firms when they look at relocating to Arizona," Gillespie said. "We can only sell our sunshine so much."