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By Rod Slaughter, Vice President, Property Tax | October 19, 2020

How retail properties can manage property taxes amid pandemic-induced cash flow challenges, fears of tenant closures

The pandemic hit the vulnerable retail sector hard in multiple ways and is accelerating changes that were already underway as a result of trends in consumer spending and shopping habits.

The sector has diverged into two distinctly different streams. Service-dominated retail, which was performing well before COVID-19 shut down stores, continues to perform well – specifically because it wasn’t as negatively impacted by closures as other retailers. Food-anchored retail, especially properties with grocery stores, have been performing well.

It is incumbent upon the landlord to do everything in their power to ensure tenants know that any chance for tax mitigation has been attempted.

Rod Slaughter

Vice President, Property Tax, Altus Group

The other stream is mercantile. Already feeling the effects of the e-commerce juggernaut, this portion of the sector, especially fashion, is struggling for survival. Mercantile retailers located in tier 2 assets such as small, enclosed malls; outlet malls; and big box power centres are experiencing more challenges than similar retailers in tier 1 properties such as large enclosed shopping malls. Many tier 2 retailers are struggling for survival, and growing numbers are permanently closing.

Overall, owners and operators are reassessing their strategies and structural decisions around leases to adapt to ongoing challenges and shifts in consumer and tenant expectations.

Current and future cash flow is a major concern. To help tenants survive, many landlords have been extending rent reductions, abatements and deferrals to retailers unable to access Canada Emergency Commercial Rent Assistance (CECRA). Notwithstanding a percentage of bankruptcies and closures, property owners are hopeful these breaks will be repaid rather than becoming permanently lost revenue.

Tenants pushing landlords to help reduce expenses, including property tax

With shutdowns abated, at least for now, shopping traffic is reviving. But it comes with costs. Many retailers continue to contend with higher expenses and lower revenue, and they are pushing landlords to help.

Property tax is one obligation that can be mitigated. For most landlords in this sector, this tax is a flow through expense. For tenants, it can be a significant expense. It is also a variable expense. Property tax is based on an assessment – and an assessment can change based on a change in property value. Given what is happening in the retail industry in 2020, values are definitely changing. The following strategies can moderate this variable expense.

Looking forward: retail on a path of major change

Propelled by COVID-19, retail is transforming. With evolving consumer preferences and spending and the growth of e-commerce many landlords will be faced with making major changes to their shopping centres and malls: different tenant offerings; tech-driven, experiential or exclusive services; and, in some cases, entirely repurposed spaces.

Landlords will also be called upon by tenants to help reduce expenses. Property owners who can help tenants survive this economic downturn through proactive strategies such as property tax mitigation will be rewarded with long-term financial stability for your real estate assets.

Rod Slaughter

Vice President, Property Tax, Altus Group

Review the current property assessment to ensure it’s at the lowest possible fair and equitable value

Tenants want to know that landlords are taking steps to keep expenses down. A thorough review of property tax will provide some of this reassurance.

Most retail properties in Canada are assessed on the income approach. Since the income-producing capabilities of retailers and landlords are being drastically hindered, this will affect value.

The current physical condition of a property is another consideration in assessing value. Because of the effects of the pandemic, some malls and shopping centres, or portions of them, may be converted into other uses. So, the physical condition of these spaces will be substantially different than that upon which the assessed value would have been based. This is a potential avenue to argue the physical condition and obtain relief.

Search for avenues of appeal

Because pandemic events were not occurring as of any legislated reference date, except in British Columbia and Alberta where the valuation date is July 1 of this year, it may be challenging to find short-term relief in assessments. Meanwhile, property owners should direct their internal team or tax consultants to search for opportunities in local legislation for other avenues of reconsideration.

Track everything related to the impact of the pandemic on revenue and expenses

To be prepared for an appeal opportunity, a request for information by the assessment authority, or a discussion with an assessor, property owners should record details and gather documents. This includes rent deferrals and increased expenses such as cleaning and security, and any capital improvements such as HVAC. It will also be informative to track monthly sales per square foot along with mall closures and traffic counts pre- and post-opening.

For any potential acquisition, scrutinize the dates pro formas recognize

The situation in the retail sector is changing constantly, rapidly and drastically. When assessing a potential acquisition, it has never been more important to examine dates. Pro formas, for example, could be based on year end 2019 – a date when property values could be quite different than they are now.

Managing Property Taxes Through a Pandemic report cover

Manage property taxes for all of your assets, through the pandemic

To help you closely align property tax mitigation strategies with the current marketplace, this white paper presents a current picture of the challenges facing nine distinct asset classes in the time of COVID-19, along with steps to mitigate the impact of this consequential expense.

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