Assessor: Commercial property valuations to drop for first time in decade 

A street in Denver shot from a drone-mounted camera in March 2020, during the government shutdown in the early days of the COVID-19 pandemic. (Courtesy of Guerilla Capturing)

On May 1, for the first time in a decade, the government’s overall valuation of commercial property in Denver will decrease.

Denver Assessor Keith Erffmeyer told BusinessDen Friday that the COVID-19 pandemic is prompting the first dip since the Great Recession.

“Each property is different,” Erffmeyer said. “Hotels will go down the most on a median standpoint, followed by retail, then offices. Not sure warehouses see decreases. Some might, but some might not.”

Residential property continues to increase in value, COVID-19 notwithstanding, Erffmeyer said.

Property tax bills are derived directly from the assessed values of real property. And those tax bills affect more than just property owners, because they’re often passed down to commercial tenants through lease agreements.

But, Erffmeyer said, while diminished valuations for many subclasses of commercial properties will take a nibble out of the tax bill, it’s probably not going to be as big a drop as business owners might hope.

“In six weeks, everyone will get their letter notifying them of their new values,” Erffmeyer said. “I have a suspicion people on the commercial side are hoping for a bigger decrease than they’re going to see — that’s true of Denver and statewide.”

Keith Erffmeyer

May 1 is the date new assessed values are released across the state, the culmination of two years of work by county assessors like Erffmeyer. The assessments represent the period from July 1, 2018 through June 30, 2020, with that final date holding the most weight.

The pandemic, of course, set in across the country in mid-March, three months before that window closed.

“If someone stuck a for sale sign in front of their property — house, condo, biggest office building downtown — what would a buyer come on June 30, 2020 with to transact that property?” Erffmeyer said by way of explanation. “But it’s tougher than it has been in the last 28 years I’ve been here, this time around, to determine that because of the void of information.”

That’s because valuations are based in large part on sales of similar properties, and after the pandemic shut things down, commercial sales dropped significantly, giving assessors less upon which to base valuations. In a year of unprecedented challenges, it was yet another.

Erffmeyer discussed this problem — and how his office worked to overcome it — and more during his conversation with BusinessDen Friday. What follows is a condensed version of that conversation.

BusinessDen: So what can property owners expect May 1, then? Are values decreasing substantially in some sectors?

Keith Erffmeyer: For hotels especially, I’d say substantially is a good way to describe value changes. We’re talking double-digit decreases in terms of percentages, which is a pretty significant shift. We’ve seen double-digit increases for a number of cycles. This is a reversal of trends, hotels being the worst — or the best, depending on your perspective.

Retail will likely see more decrease than increase, same with office buildings, though not sure that reaches double-digit decreases. Keep in mind, there’s 12,000-ish commercial properties in Denver, so this all ranges, of course.

The last time this happened was 2011, reflecting June 30, 2010. It’s gone up since then, ’13, ’15, ’17, ’19. Across the board, commercial or residential. Denver — Colorado for that matter — has enjoyed a decade of pretty robust growth. And even now, if we do reflect those decreases in commercial, it’ll be more or less offset by the increases in residential. That’s going up a lot. That makes it hard to predict the tax base overall, but my guess is plus or minus a few points, or close to flat.

BD: Could you walk us through the process for creating a new assessment?

KE: We take sales from a certain period of time, data, really, including sales, and we call that the base period. From July 1, 2018 — the day after the previous base period ended — through June 30, 2020, with June 30 being that real magical date, the date of valuation. And we assign values. What’s the property value, had it sold on that date?

It’s pretty important, that’s three-ish months after COVID started, nine months in the past, and anything that’s happened since then — good, bad or ugly — we can’t consider.

We review a ton of data in Denver, tens of thousands of sales, talking residential property primarily, and verify those sales. We make sure they’re arms’ length sales, as in not a father selling to a son or a business partner buying out another business partner. We verify characteristics at the time of sale.

Commercial is a little different, but residential we do multiple regression analysis, the same thing Zillow or those companies would do, it’s an algorithm — basically geeky math. But we do that, measure statistically how we’re doing, we get audited, have to have our statistics in a certain range, I won’t go into all the gory details.

But we’re using sales to try and tell us where the market is and then mass appraisal techniques to assign values not just to sold, but to unsold properties, to make sure they’re uniform. Similar properties should be valued similarly.

BD: What goes into the assessment of a property? And what doesn’t?

KE: The state constitution says there’s only three ways to approach value, and these are known internationally.

First is the cost approach, which is how much would it cost to acquire the land, build the building, less appreciation. That’s tough.

Income approach is next, the income to the property and the property owner goes into it.

And third is market approach — some call it sales comparison approach — and that’s what you experience buying a house, getting an appraisal, etcetera. It uses comparable sales from the neighborhood, adjusts for characteristic differences — bigger houses adjust up, smaller adjust down.

State constitution says residential property you can only do the market approach, including apartments. Commercial property, you’re supposed to consider cost, market and income approaches.

We prefer to use the income approach. It’s often informed by sales, because typically sales and income there’s a nexus there. If an investor is buying an income stream and it pays a certain amount, that demonstrates the market for that income stream. But it gets tricky because it’s income to the property, not to the business.

Think of a retail building on Colfax. If I owned and leased it, I might lease it for X dollars per square foot, some expenses, and I’d capitalize the net income into value. That’s different than someone running a clothing store, a liquor store, any kind of retail — restaurant, office, marijuana shop. That doesn’t have anything to do with the property value. That’s the business value.

Another way to put it: We have two buildings next to each other, identical in every way. One’s running a business that’s doing very well. The other is not. But those properties’ buildings could be identical in every way — size, shape, year of construction — so property value should be the same. That’s the difference that gets really confusing.

And the reason I say all that is business owners, with COVID, were shut down for considerable periods of time. But the effect on their property value isn’t as severe as the effect on their business.

BD: So take a hotel, which took a huge hit in the pandemic, and put it next to an apartment building, or a retail outlet. They’ve got different uses. Would the assessment change in any way as a result of the hotel’s business being of less value over that period of time?

KE: Yes, so for a hotel, the impact of COVID is much more severe than apartment buildings, given similar, across-the-street scenarios. We would value them differently to begin with, because of the state constitution. But see, this time around, and we revalue every two years, I could see the apartment building going up 20 percent, and the hotel might go down 10 percent, 20 percent, even 30 percent. Even though they’re across the street from one another, because the nature is so different.

BD: So you do factor in on some level the impact on the business of the pandemic?

KE: That’s been the tricky part this time around, because we’ve not been through this before.

We actually formed a metro-area assessors group, we formed teams. Individual employees from each metro area had a team to analyze and discuss offices, for one. Another discussed warehouses. Hotels, apartments, etcetera. The idea was to try to study what they could find in the public domain to inform us of how well or not well those subclasses did from the start of the pandemic until June 30. More important: How did it impact property value? Not necessarily business value, but their impact on property value.

What they found was the most severe was hotels. Next-most severe was probably retail and restaurants — which, restaurants are a subset of retail — and then the next-most severe was offices. By and large, apartments, warehouses seem to be doing just fine.

The reason we did this that way is none of us had any sales. Usually we have sales that go through the entire period. This time around, it was the proverbial tree falling in the forest, but no trees fell. Nothing is happening.

We struggled with that. We organized like we’ve never done before to study this more collectively.

The lack of sales, to be clear, were really non-residential. There was a blip for a month in the residential market, but it picked up where it left off, almost like nothing happened. Even though you couldn’t show homes, people bought them.

BD: So how much does the assessment reflect the end of the base period — the pandemic — and how much does it reflect the rest of the period, when the economy was in much better shape?

KE: Good question. State statutes are clear: We trend it all to June 30. So let’s say the stock market crashes, we’ve got prolonged unemployment, even worse than COVID was. We would drop off a cliff in terms of value. It’s different than taking 24 months of data and saying, ‘Well the last three were pretty bad, but take all that and weight it so it’s 80 percent good, 20 percent bad,’ and we come out with whatever that’d be.

It all has to trend to that June 30 date. Good, bad or ugly. As I mentioned, certain subclasses, hotels being most obvious. Other subclasses aren’t immune, but they weren’t as affected as some others.

BD: Business owners want relief. Is there a tool in your toolbelt to offer that? Does somebody have that tool? Where could relief come from?

KE: It’s a good question. It’s not in the assessors’ belts. We don’t have that statewide. Unless we missed the mark on a value, then something can be done, they can appeal their property values. But keep in mind, the value they pay right now is June 30, 2018, not what’s happening today. That can be disconnected.

Sometimes people say, ‘Value looks fine, the taxes are just too high.’ Well, OK. Good try? From an assessor’s standpoint there’s not much we can do.

There are three parts to the formula for property taxes: Value of property; assessment ratio, which is a Gallagher thing; and then third is the mill levy set by the various taxing jurisdictions.

You can’t appeal a mill levy. The assessment ratio is in the state constitution — well it was, now it’s state statute after Gallagher was repealed — and then the third is value, and that’s all assessors have control over. We can’t consider what’s happening now in terms of valuation.

However, the city does offer some assistance. For example, there was one you can apply to called the Small Business Emergency Relief Fund. Part of that was to help with property taxes. But outside of grants like that, there’s nothing in the assessor’s toolbox. If the City Council wants to put a big pot of money to help, they can do that. But the money has to come in before it goes out.

The good and maybe bad thing about assessors is we’re very directed and restricted about what we can do. I don’t get involved in policy or in haves or have-nots. My singular role is to assign value to property. After that, rebates, credits, exemptions, those are policy things with both the city and the state.

BD: Speaking of commercial/residential split, what does the Gallagher Amendment freeze from November’s ballot do to all this?

KE: It doesn’t affect the valuation piece of what we do. It does — had that not been repealed, the state would’ve been required to recalculate from all 64 counties what the residential rate should be to apply it to this tax year, or taxes payable next year. Because of commercial going down and residential going up, in order to bring that back into balance, they’d have had to reduce the residential ratio to bring it back to Gallagher’s requirement.

That’s not going to happen now. Residential rates stay the same. From a commercial standpoint, it doesn’t affect much of anything. If anything, mill levies won’t need to change as much. Commercial owners won’t notice a difference. Residential property owners won’t know it, but they’ll pay higher taxes as a result, because their rate won’t go down. It’ll be reflected on the tax bill all 2.9 million property owners in Colorado receive in January. But it doesn’t impact our job, which is value.

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