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By Altus Group | April 14, 2020

By Trey Beazley, MAI, President – US Tax, Max Row, MAI, Senior Director, Nick Carter, MAI, Director, and Will Beazley, MAI, Director

The month of March was a difficult month for anyone with a newsfeed.  The economic and public health headlines have been difficult to watch and difficult to weather. For many of you, there may have been a threat to your portfolio or more importantly, your health.  Our hearts go out to anyone with a family member or friend impacted by the COVID-19 virus.

As professionals in property tax, we thought it might be helpful to discuss our observations from previous downturns to guide some expectations for coming tax cycles.  We hope to offer a little bit of insight and yes, maybe even provide a little encouragement.  Ad valorem tax expenses are encumbrances that by design (and definition) must react to the markets.  After all, it’s market value that is the basis for property tax, and it is the market fundamentals that are in turmoil.

Those of us who bid farewell to the “2010’s” on New Year’s Day 2020, probably did so with optimism, as we all had enjoyed a decade of exceptional growth in asset prices across sectors.  The S&P 500 stock index returned a robust 201% to investors (11.6% compounded annually), and REIT stocks (as measured by Vanguard’s Real Estate Index Fund ETF VNQ) returned 120% (8.2% compounded annually).  In my home market of Dallas / Fort Worth, many zip codes have more than doubled during the decade[1], very out of character for this traditionally slow-and-steady market!  Unfortunately, with many Americans lacking the dollars to invest, and with the United States Real GDP growing by only 25% during the decade (2.2% compounded annually)[2], one is left to wonder; were high asset prices enough to award high marks to the economy of the 2010’s?


Source: Yahoo Finance Total returns S&P 500 vs Vanguard Real Estate Index Fund ETF (VNQ) 10 Years Ending December 31, 2019 Close price adjusted for splits and dividends


All we needed to answer this question was a stress test; and in March we got one. The COVID-19 pandemic and our subsequent reaction have stressed many businesses to the brink of insolvency. Blame has been dispersed across multiple sources from over-employment of liquidity (with particular scathe to stock buybacks) to over-leverage. While small businesses are certainly without resources to weather the storm, there are plenty of big businesses that are having the same issue.

A chain reaction has begun that will result in a considerable long-term hangover. Unemployment will continue to spike; leases will abate or terminate; and real estate, as always, will be the last sector to report distress. During the early months of a downturn, real estate transactions fail to close, and truly comparable transactions become unavailable. However, the lack of comparable transactions in a taxing jurisdiction is not a valid excuse for the assessor to overstate the market value of a property.

The real estate market has consistently delivered the same lesson during each downturn: Just because real estate doesn’t broadcast pain on a tickertape in real-time doesn’t mean that pain doesn’t exist.

It is critical that real estate owners obtain skilled property tax representation during these periods. At Altus each of our consultants is trained in appraisal methodology, and all are constantly consulting with our staff MAI appraisers. These highly qualified appraisers have decades of experience successfully presenting complicated market value cases during complicated economic periods. This capability, along with our ongoing dialogue with jurisdictions, gives our clients the best shot at fair treatment.

So how exactly have property taxes reacted during prior periods of economic distress? How have assessors interpreted economic “shocks” and what kind of results have been secured? The following is a discussion of prior recessions. This history will shed some light on what taxpayers can expect in the coming months/years.

1987 to 1990: “Black Monday” & Savings and Loans Implode

The October 1987 “Black Monday” drop of 507 points on the Dow Jones Industrial Average represented a 22.6% decline from that day’s opening.  At today’s levels, the Dow would have had to fall 5,240 points to match the October 19, 1987, percentage decline. On March 16, 2020, the index fell 2,997 points. This represented a decline of just under 13%.  March 16, 2020 is an important date because it represents the single biggest decline this year.  In 1987, real estate bore greater blame than during today’s declines.  Today, banks are still cognizant of the 2009-2010 bust and underwriting standards have remained conservative by historical standards.  In 1987, the savings and loan institutions were writing reckless loans and real estate markets reacted to this flood of liquidity by steaming to historical highs, both in terms of the pace of new development activity and real estate values across all sectors of the real estate market.

After the collapse, and during the workout, the Resolution Trust Corporation (RTC) was created by the feds as a temporary holding company for bank “real estate owned” (REO) assets.  The RTC by mandate had no interest in holding onto these assets so the auction blocks lit up. REO sales flooded the market and many bankers, appraisers, and borrowers found themselves facing indictment for prior practices.  All in all, many real estate careers ended, and many real estate empires began.

From an assessment perspective, finding an appropriate market value indicator was not a simple process.  It took several assessment cycles for assessors to recognize REO sales as being qualified for comparable analysis.   Assessors had argued that REO sales, which comprised a clear majority of transactions, were distressed, and thus not comparable to their identical non-distressed neighbors.  Ultimately, due to the scarcity of non-REO sales, the assessment community came to recognize that the “market standard” had in fact changed.

Although a subject property may not be distressed, competing against distressed sales results in depressed pricing.  REO sales really did tell the story.  Furthermore, the “typically motivated” component of the Appraisal Institute’s definition of “Market Value” sealed the deal[3].  If a vast majority of real estate transactions involve bank sellers motivated to offload owned real estate in an expeditious manner, that is the “typical motivation,” and that is the market.

1999 – 2001: The dot com bust and 9-11

The “one-two” punch of the dot-com bust, and 9-11 terrorist attacks did not provide the widespread real estate declines as in other recessions.  The dot-com bust manifested itself in a 78 percent decline in the NASDAQ[4] as most exchange participants were financed by the roulette board of mid-to-late series venture capital.  Burgeoning Internet firms, which were in their infancy, were not yet profitable and those that were, were traded at PE ratios in the low to mid hundreds.  Venture capitalists were earning such massive returns on a single initial public offering (IPO) that they were able to cover a wide dispersion of losing bets.  The real estate declines of this period were concentrated in the office sector, and primarily in urban and coastal markets.  The nine-county San Francisco Bay Area was ground-zero for the real estate implosion of the dot-com era.  Loans were not the culprit in these declines, it was exuberant venture and angel capital.

From a real estate perspective, tech entrepreneurs were using early series funds to ditch the proverbial “garage” and snatch up premium office space.  Landlords in San Francisco were writing leases at annual rents approaching $100 per square foot[5] to tenants that never collected a dime in revenue.  The inventory of office square feet in San Francisco, if spread out across a roulette board, matched the landscape of overzealous venture finance in the late 1990’s.  Unfortunately, the bets that failed were settled by landlords, not by the VC’s.  The occupants within the San Francisco office market were truly ticking time-bombs of insolvency.  The bets that failed, defaulted, and vacancy rates in 2001 skyrocketed, plunging asking rents and values.

On September 11, 2001 the already teetering post dot-com markets were dealt a potentially catastrophic knockout punch.  The greatest terrorist attack to occur on our nation’s soil sent markets into turmoil.  In response, the federal government passed fiscal policies that would carry an era of economic growth for years to come.  Most real estate markets weathered this period surprisingly well and the road to recovery was well underway.  However, one example of a market segment particularly hard-hit post September 11, 2001, was the hospitality industry.  Revenues dropped substantially across all property types and it took years to recover.

2009-2010: The Collapse of Lehman Brothers and Implosion of Mortgage Debt 

Domestic home building has always had great economic side effects.  Homebuilding doesn’t just create jobs in banking, construction, and professional services, it expands wealth creation, which flows quickly into consumption. One might even argue that home building is one of the most economically-stimulative sectors.  All skill sets benefit from expansions in home building, from the trades all the way to high finance; and the jobs created are based here in the United States.

The post 9-11 deregulations in lending created a considerable bubble that manifested itself on the balance sheets of the banks.  Lenders were having a field day under this new environment.  Borrowers were not required to prove income, and interest only loans were handed out liberally on the basis that spectacular growth in values would support the robust re-finance exit models.   Banks were able to issue loans quickly and then instantly remove them from their balance sheets by selling them to investors who packaged and resold the loans.  By design, unemployment decreased, home ownership increased, consumption increased, and a period of expansion ensued.  The policy worked, until it didn’t.

A decade of unbridled lending policies eventually came home to roost on September 15, 2008, when Lehman Brothers, one of the nation’s largest investment banks, filed the largest bankruptcy claim in the nation’s history.  Many of Lehman’s equally stressed peers hinted towards similar workouts and investors began to offload bank securities in droves.  The chain reaction was set in motion and quickly led to massive borrower defaults and foreclosures.  Banks were once again in the real estate business.  Unemployment during this period shot back up, with those in finance being some of the most impacted. Home values plummeted in the same manner as occurred in the late 1980’s.  The greatest drops were in the United States “sunbelt” markets where homebuilding was the most expansive.

During their reassessments, many assessors did recognize the declining market stemming from the Great Recession. However, the great recession produced massive market-wide declines and most assessors did not realize the full impact. Some assessors assumed freezing valuations would protect their tax base, and many property owners chose not to protest the “frozen values”.  Unfortunately, many owners still saw an increase in tax liability as jurisdictions ended up increasing the tax rates instead of the values. Many property owners who did protest their “frozen values” ended up lowering their tax liability as it became evident that the “frozen” values were still above market levels.

Protesting values to jurisdictions during a crisis requires a solid understanding of market fundamentals. The lack of transactions during a crisis can create difficulties in determining market values, market rents, and cap rates. In a market where comparables are scarce, alternative methods to extract market data must be employed to capture current market conditions properly.

The Appraisal Foundation provided direct guidance on the matter with the issuance of APB Valuation Advisory #3: Residential Appraising in a Declining Market on May 7, 2012. This valuation advisory noted that it is inappropriate to immediately disregard all sales that are bank-owned, short sales, or involve financially distressed sellers, especially in markets where these types of transactions make up nearly all the transactions in a market. [6]

Finally, for property owners in jurisdictions that have non-annual reassessment cycles, a property’s value can be appealed during a non-reassessment year. In an appreciating market, non-reassessment year appeals are rare because values are increasing. However, in a declining market, appealing values during non-reassessment years ensures that your property taxes reflect the declining market.

2020 – What Can We Expect?

One constant across recessions is that assessors have been late to recognize decline.  Although we can acknowledge that distress exists in real estate even though the impact may be slower to manifest through hard market evidence, assessors still need to be convinced.  It may be one to two years before assessment notices truly recognize any declines.  Luckily for taxpayers, the appeal process opens the dialogue between taxpayers and assessors and the noticed value is not necessarily the final value.  Altus Group’s highly skilled consulting and valuation team represents a widely varied clientele from the informal review/negotiation process through the local assessment board level and, when necessary, through litigation, in order to achieve equitable assessments reflecting current market trends.

In addition to any market value arguments, other alternatives can also provide taxpayer relief.  Some jurisdictions, by mandate, allow for the consideration of events that have occurred past the lien date.  For a January 1, 2020, lien date, this could be very meaningful in a tax appeal.  Many jurisdictions have already provided for a deferral of tax payment, and others are anticipated to follow suit. State and local taxes are no different from federal income taxes in that those who have mastered the rulebook will have the best outcome. Unfortunately for property taxpayers, there are hundreds of different rule books.  This is why having a firm with experts with years of experience and offices across the country can be such a benefit.

On behalf of myself and my colleagues at Altus Group, thank you for the confidence you have instilled within our team.  We are working daily on ensuring that we stay on top of developments in both the real estate markets and assessment response.  Altus Group’s tax consulting and administrative staff is continually monitoring the implications for taxing jurisdictions nationwide and publishes a daily report on changes impacting taxpayer clientele.  We hope that you will refer to this ever-changing guide as a valuable reference source: State and local tax changes due to COVID-19.

[1] Zillow Group
[2] U.S. Bureau of Economic Analysis
[3] The Appraisal Institute, The Appraisal of Real Estate, 14th ed. Chicago: The Appraisal Institute, 2013. p. 59
[4] The Wall Street Journal: Lessons From the Dot-Com Bust, Online Edition, March 8, 2020
[5] San Francisco Chronicle: Booming SF Hits New High for Office Rent, Beating Dot-Com Record October 3, 2018
[6] Coon, K., Coonrod, M., Follain, J., Harmon, D., Pistilli, T., & Rattermann, M. (2012, May 12). APB Valuation Advisory 3: Residential Appraising In A Declining Market (Publication). Retrieved April 13, 2020, from
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