Tax-value sticker shock

Revaluations | It's worth that much?

RALEIGH -- Homeowners who were stunned last month by sky-high property-tax revaluations: Be glad your home isn't Crabtree Valley Mall or Wachovia Capitol Center.

The 1.3-million-square-foot Raleigh mall was notified that the 2008 tax value of its biggest parcel is $403.7 million -- almost 2 1/2 times its previous value.

For downtown Raleigh's Wachovia tower, the Triangle's most spacious office building, it is $150.5 million, up 117 percent.

Commercial real estate values, fueled in recent years by a surge in rental-property investment, rose 57 percent in Wake County's latest tax assessment.

Wake residential values, by comparison, rose 37 percent in the once-every-eight-years study of all county properties, completed last month.

For homeowners, big bumps in value could mean paying hundreds of dollars more in taxes. But for commercial landlords, tens of thousands of dollars are at stake.

And so begins a duel between the landlord and the tax man.

Landlords want minimal operating costs so they can charge competitive rents or pocket more revenue for investors and shareholders.

Tax officials, meanwhile, must make sure they're not shorting taxpayers. Property taxes make up half of Wake's budget. And about 28 percent of property taxes come from the commercial side.

The values of at least 40 percent of Wake's 16,500 commercial properties are expected to be appealed before Wake's Jan. 1 deadline, Wake Revenue Director Emmett Curl said. Of those appeals, nearly half are likely to succeed, often whittling 4 percent to 8 percent off the original assessments, he said.

Commercial property owners and tax assessors will quibble over a complex formula that includes variables such as comparable sales, potential rental income, redevelopment potential and location before they agree on a fair price.

"You want to make sure it's fair -- particularly when it's your primary business," said Jeff Sheehan, a senior vice president at Duke Realty, which owns 4.7 million square feet of office and industrial property in the Triangle.

Several of the Indianapolis company's Morrisville properties almost doubled in assessed value, property records show.

"That's meaningful money," Sheehan said.

An appeal that reduces a $20 million assessment by 8 percent, for instance, would reduce taxes by about $10,850, based on 2007 tax rates in Wake and Morrisville. Wake has not yet set its 2008 rate.

Seeking an edge

That kind of reduction could give a landlord a competitive edge. Taxes and other operating costs are often passed through to tenants.

If costs push rents too high, landlords run the risk of incurring reducing returns or having tenants run to a competitor.

"If that's 8 or 10 cents [per square foot in annual rent] my competitor could do and we couldn't because we were lazy and didn't do the math, that hurts in the long run," Sheehan said.

That's why real estate investment trusts such as Duke and rival Highwoods Properties of Raleigh hire people whose sole job is to examine assessments across the country and appeal them when they seem out of line. In other words, they do the math.

That's what Amy Hudson has done for Highwoods for the past eight years.

Hudson is the company's manager of property tax. From an office in Rock Hill, S.C., Hudson opens envelopes representing the buildings in Highwoods' 3.7 million-square-foot Triangle portfolio.

She analyzes each building, matching square footage, comparable sales, age, rental income, building height, replacement cost, land value, zoning against the county's records. She is armed with a 241-page county document, the "schedule of values."

Hudson will do this every day for the next few weeks, looking for anything off target. She's prepared to drive appeals to the state level, if necessary.

"Whether we're looking at electricity or janitorial services or paying taxes, we want bang for our bucks," Hudson said. "That eventually is going to translate into pricing -- what we require from our tenants -- and ultimately what we return to our shareholders."

Not everything would be appealed. Discrepancies have to be pretty sizable for an appeal.

Indeed, nickel-and-diming can work against a company, particularly if outside consultants or lawyers are involved, Hudson said. And there's a perception issue.

"We know how taxes affect a community," Hudson said. "That's beneficial to everyone, and we want to pay our fair share."