By Morgan Klabenes, SVP Strategic Solutions
After several years of not-so-great news in the commercial real estate sector, things seem to be looking up for some commercial real estate asset classes. According to the JPMorgan Chase 2024 Commercial Real Estate Midyear Outlook, multifamily, retail and industrial sectors remain strong even in the higher-for-longer interest rate environment. Office vacancies, however, are on the rise, hitting a record high of 20.1% as of the first half of 2024, according to Moody’s. This isn’t surprising given the new work-from-home and flexible in-office work habits of the American worker. Despite the positive news for some commercial sectors, those in the commercial lending and property management space are more focused than ever on maintaining liquidity and searching out additional opportunities to improve efficiencies and reduce costly mistakes. One of those opportunities is how owners and property managers approach paying commercial property taxes. Here are three commercial tax tips to help maximize efficiencies, improve cost savings and productivity, and reduce delinquencies
Pay Attention to Parcels
Accurate parcel identification is essential to reduce risk and avoid surprise tax bills. A mismatched, or unidentified, parcel ID can result in a tax payment being applied to the wrong property or not being included at all, both of which can then lead to delinquencies, adjustments to previous payments, and refunds. Not only do these scenarios incur unnecessary penalties and fees, they eat up staff time in rectifying the situation and could affect tenant relationships.
For commercial properties, the risks of inaccurate parcel identification are higher than on residential properties because commercial structures can often span multiple parcels. For instance, a property could have a parking garage that might not be on the original parcel or was built later and, therefore, not included when the builder/developer took out the initial loan. Coastal properties can have boat slips, docking spaces, and other ancillary elements that may not be adjacent to the original property. In metro areas, parking spots that are guaranteed with the property, especially in multifamily developments, may not be adjacent to the property depending on the age of the original property and how things have been rezoned and resold throughout the years. Chicago condos are famous for guaranteed parking spots…three blocks over.
Because commercial properties don’t turn over as frequently as residential properties, searching and identifying all correct parcels associated with a property can be more challenging. In fact, a lot of commercial lenders, even large, legacy ones, don’t have the ability to identify parcels. As a result, having access to timely parcel search and identification—including for unique parcel situations— through a property tax provider like LERETA is essential to the bottom line.
Don’t Let Confusing Owner Entities Create More Hurdles
While very similar in many respects, perhaps the main difference between residential and commercial property taxes is the transparency of ownership. For most residential properties, ownership is typically held in someone’s name. With commercial properties, however, the owner entity could be an LLC, a holding company, a corporation or a group of owners or companies that own a single property. Many commercial properties are cross-collateralized with multiple owners, further complicating complete ownership identification. Having a platform that can consume reporting on different owner entities from the various taxing agencies is critically important. LERETA uses its proprietary technology and data normalization process which provides flexibility to identify, report and manage property taxes for complex ownership structures.
Stay One Step Ahead of Delinquency Reporting
As a result of the downturn in commercial values, delinquencies in commercial property taxes have become more frequent—and therefore more concerning. This, in turn, has led to a greater emphasis on accurate delinquency reporting and having a suite of delinquency reporting products that fit different scenarios. When managing a small number of delinquencies, there can be more flexibility and accommodation: for instance, with the lender advancing payments while the discrepancy is resolved. But managing a larger number of delinquencies—which comes with larger financial risk— requires a more comprehensive plan. What we’re hearing from our commercial tax clients is that delinquencies won’t be getting better in the near term. Because of the more complex nature of commercial property tax reporting and payments, the discussion is expanding beyond simply requiring accurate, on-time property tax data to include having a payment provider, like LERETA, that is responsible not only for the data, but also for on-time payments. More widespread delinquencies lead to more risk, and that has led to an increased appetite to closely monitor changes in both delinquencies and ownership.
It’s important to remember that unlike residential mortgages in which approximately 80% of borrowers set up an escrow account for their property taxes, it’s the exact opposite with commercial properties. Only about 20% or less typically escrow for taxes, which makes managing delinquencies even trickier. Also, important to note, is that managing risk is not constant across geographies and lenders, particularly if the loan is spread across different collateralized investment vehicles and/or owners. Investors have different guidelines for risk tolerance, protocols for when to pay and when to hold payments, and whether paying a delinquent loan is passed down to investors or is covered in-house.
Furthermore, some states have much longer or shorter foreclosure lead times than others, which means careful attention should be paid to determining how best to prioritize managing delinquent loans. This is why LERETA offers a delinquency severity report that indicates what needs a quick decision, what can wait, and what steps can be taken to buy more time. This helps tax managers manage their portfolios and plan delinquency payments more strategically without having to put every loan through the same process, which may or may not work for that loan.
For more information on commercial property tax servicing, click here.
