Commercial Property Taxes Get More Attention as Challenges with Commercial Real Estate Persist

By Morgan Klabenes, SVP Strategic Solutions

The commercial real estate sector is showing signs of recovery in certain asset classes, according to the JPMorgan Chase 2024 Commercial Real Estate Midyear Outlook. Multifamily, retail, and industrial sectors remain resilient despite a high-interest-rate environment. However, office vacancies have reached a record 20.1% in the first half of 2024, per Moody’s, driven by evolving work-from-home and hybrid work trends. Amid these dynamics, commercial lenders and property managers are prioritizing liquidity, operational efficiency, and risk reduction. One key area of focus is optimizing commercial property tax management. Below are three essential tips to maximize efficiencies, reduce costs, and minimize delinquencies.

1. Pay Attention to Parcels

Accurate parcel identification is critical to avoiding costly errors and surprise tax bills. Mismatched or unidentified parcel IDs can lead to:

• Taxes applied to the wrong property or omitted entirely.
• Delinquencies, payment adjustments, or refund issues.
• Penalties, fees, and staff time spent resolving errors.
• Potential strain on tenant relationships.

Why It’s Complex for Commercial Properties:

• Commercial properties often span multiple parcels, unlike residential properties. Examples include:
  • Parking garages built on separate parcels or added later.
  • Coastal properties with non-adjacent boat slips or docking spaces.
  • Urban multifamily developments with guaranteed parking spots blocks away (e.g., Chicago condos).
• Commercial properties have lower turnover than residential ones, making it harder to track all associated parcels over time.
• Many commercial lenders, even large institutions, lack robust parcel identification capabilities.

Solution: Partner with a property tax provider like LERETA, which offers timely parcel search and identification services, including for complex or non-adjacent parcels. This ensures all parcels are accounted for, reducing the risk of missed payments and enhancing financial accuracy.

2. Don’t Let Confusing Owner Entities Create More Hurdles

Ownership structures for commercial properties are often more complex than for residential ones, complicating tax management. Key differences include:

• Residential Ownership: Typically straightforward, with properties held in an individual’s name.
• Commercial Ownership: Often involves LLCs, holding companies, corporations, or groups of owners, with properties sometimes cross-collateralized across multiple entities.

Challenges:

• Identifying complete ownership details across various taxing agencies.
• Managing reporting for diverse owner entities, especially when properties are part of complex investment structures.

Solution: LERETA’s proprietary technology and data normalization process provide:

• Flexible identification and reporting for complex ownership structures.
• Seamless integration of data from multiple taxing agencies.
• Accurate tax management, reducing errors caused by ownership complexity.

This approach ensures transparency and streamlines tax payments, even for properties with intricate ownership arrangements.

3. Stay One Step Ahead of Delinquency Reporting

Rising delinquencies in commercial property taxes, driven by market downturns, have heightened the need for robust delinquency management. Key considerations:

• Escrow Differences: Only about 20% of commercial properties escrow taxes, compared to 80% of residential mortgages, increasing the risk of missed payments.
• Varying Risk Profiles: Delinquency management varies by geography, lender, and investor guidelines, which differ in:
  • Risk tolerance.
  • Protocols for advancing payments or holding delinquent loans.
  • Decisions on whether delinquent payments are covered in-house or passed to investors.
• Foreclosure Timelines: States have different foreclosure lead times, requiring tailored strategies for prioritizing delinquent loans.

Challenges:

• Small-scale delinquencies may allow flexibility (e.g., lenders advancing payments during resolution).
• Large-scale delinquencies involve greater financial risk, necessitating comprehensive strategies.
• Clients report that delinquencies are unlikely to improve soon, amplifying the need for proactive solutions.

Solution: LERETA offers a suite of delinquency reporting tools, including a delinquency severity report, which:

• Prioritizes actions by identifying loans needing immediate attention, those that can wait, and options to buy time.
• Enables strategic portfolio management, avoiding a one-size-fits-all approach.
• Supports on-time payment services, reducing risk by combining accurate data with reliable payment execution.

By integrating data and payment services, LERETA helps clients mitigate the financial and operational risks of widespread delinquencies.

Why These Tips Matter

In a challenging commercial real estate market, efficient property tax management is a strategic advantage. By addressing parcel accuracy, ownership complexity, and delinquency risks, commercial lenders and property managers can:

• Reduce costly errors and penalties.
• Improve operational efficiency and staff productivity.
• Enhance tenant and investor relationships.
• Maintain liquidity in a high-interest-rate environment.

LERETA’s advanced technology, data expertise, and comprehensive reporting tools empower clients to navigate the complexities of commercial property taxes with confidence.

For more information on commercial property tax servicing, visit LERETA’s Commercial Tax Solutions page.