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By Paul Chmeleski, Senior Consultant, Property Tax | December 28, 2020

Pressures on multiple fronts continue to impact cash flow for many seniors housing properties

  • Along with an increase in immediate expenses, many increased costs will continue for the long term, such as added labour and health and safety protocols.
  • Liability insurance costs will increase because of higher risk management requirements.
  • Many older properties will require retrofitting to convert shared bedrooms and washrooms to private spaces and to enlarge common spaces.
  • More government regulations are anticipated, especially for long-term care homes; compliance will add costs.

For more details about capital and transaction markets and the pressures this sector is experiencing related to operations, supply and demand, refer to: In the time of COVID: A snapshot of Canada’s seniors housing industry.

Owners don’t want to miss what could be significant savings opportunities. They should be mindful of what’s currently happening in each property and directly engaged in the property tax assessment process.

Paul Chmeleski

Senior Consultant, Property Tax, Altus Group

Numerous avenues to potentially reduce property taxes

Many seniors housing operators view property tax as a fixed expense – albeit one that increases every year. Across Ontario, 85% of property tax is subsidized in long-term care homes so most have little incentive to spend time addressing assessments.

But for retirement residences, property tax represents a significant expense – and one that is also likely to increase significantly in coming years as governments strive to make up budget shortfalls.

The following strategies can help to cap, and sometimes reduce, this pressure on cash flow.

Document year-over-year changes in property performance

This is an opportune time to gather records and take note of key indicators that demonstrate the impact of COVID-19 on property value. Revenue, occupancy, turnover, average days to lease, net income, increases in operating expenses, upgrade and retrofit costs are all informative metrics.

Look for appeal opportunities

There are many complexities in the senior housing industry that can lead to inappropriate property assessments – and opportunities for appeal. For example, if your property has a dementia care wing but for assessment purposes has been compared to an independent living property, expenses will be significantly different; this may represent an inequitable comparison, and potentially a higher property tax burden.

Moreover, many seniors housing owners operate in multiple jurisdictions. Different jurisdictions use different valuation methods and classify these properties under varying classifications. Adding to this complexity, there are few transactions occurring right now, which makes it challenging to establish capitalization rates when applying the income approach.

If there is one missed opportunity to reduce taxes which accumulates for several years – and this applies to several properties – cumulative taxes could be punitive. This is a heavy, and unwarranted, expense.

Scrutinize property tax assessment for any potential acquisition

When evaluating a property for a potential purchase, it is critical in this shifting environment to review the accuracy of the property tax assessment to minimize liability.

For example, it’s important to rule out the likelihood of the taxing jurisdiction significantly increasing the assessed value of the property. Secondly, a thorough property tax review can spot errors. In one instance a senior apartment building was assessed in a residential classification rather than the correct multi-residential classification. Since the latter was more than twice the residential rate, this represented a significant liability for the prospective new owner. 

Looking forward: demand will grow

In 2020, Canada’s total supply of seniors’ housing grew by 3.9% to 65,049 spaces, outpacing growth in demand. Average rent for a standard space increased by 2.8% to $3,865. 6 But by 2035, the Conference Board of Canada estimated (in 2017), that even after accounting for efforts to shift more long-term care into individuals’ homes, Canada will need an additional 199,000 beds in long-term care facilities – a near-doubling of the 2017 stock of 255,000 beds.

This year may be one of the most volatile ever in the history of Canada’s senior housing sector. In the coming years, investors, developers and owners will continue to grapple with elevated expenses to maintain high quality of care and safety. Effectively managing property taxes will become increasingly important to cash flow and the bottom line.

Paul Chmeleski

Senior Consultant, Property Tax, Altus Group

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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