June 26, 2020

Real Estate Assessments: A Challenge to Fair Market Value During COVID-19

4 min

Commercial property owners and developers in Virginia have been left adrift in the wake of the COVID-19 pandemic (“COVID-19”). With real estate tax appeal deadlines either in the rearview mirror or quickly approaching, little in the way of guidance has been circulated by county or state authorities. Many states have reacted to the pandemic by delaying appeal deadlines, initiating revised assessments or offering steps that property owners can take to challenge 2020 assessments, but Virginia has otherwise stayed silent. We expect that once the damage of this pandemic has been realized, property owners will seek to appeal and actively challenge valuations for 2021.

In Virginia, the valuation of real property for taxation is generally done on an annual or biannual basis at the discretion of the county, city or town in which the property is located. Real estate assessments are prepared on January 1st of each year, prior to the tax year in question, and mailed in the months thereafter. Virginia local real estate assessors are constitutionally bound to reflect fair market value in their assessments. Commercial real property in Virginia generally is valued using the “income approach,” which uses a capitalization rate as applied to the property’s income to determine the property’s value. This approach considers the ability of the property to earn income through rents, taking into account the operating expenses and allowing for vacancy and collection losses. The resulting net operating income is then capitalized into value with an appropriate rate to achieve a fair market value estimate. This value is then compared to the available market sales to determine if the property's assessment should change. Other approaches to value, such as the cost approach and the direct sales approach, are also used in the assessment process each year.

Once the notice of assessed value is issued to the property owner, the property owner will have deadlines by which it must file an appeal to assert that the property has been overvalued and present reasons to support a lower valuation. For example, in Fairfax County, an administrative appeal can be filed with the County Department of Taxation (Fairfax DTA) by May 1, which allows time for review prior to the filing deadline for the County Board of Equalization of Real Estate Assessments (BOE). The BOE is an independent body appointed by the County Board of Supervisors with the responsibility of determining whether the Department of Tax Administration has equalized the assessments among property owners. The Fairfax BOE has the power to increase, decrease or keep the same assessment based on its review of an assessment. Similar procedures apply in other Virginia taxing jurisdictions.

The COVID-19 pandemic and Governor Northam’s March 30th Temporary Stay at Home Order have resulted in the nearly complete shutdown of the northern Virginia economy and derailed the underlying assumptions for these assessments. Many landlords have experienced dramatic reductions in their rental streams and expect record-high vacancy rates to increase by year's end. These effects are more significantly felt among landlords of retail and restaurant properties. These trends extend to the service, travel and hospitality sectors due to the prohibition on nonessential businesses. If tenants cannot reopen and generate enough income, many more will be forced to close for good.

It is not only tenanted properties that may be impacted. Expected delivery dates and demand for multiunit residential or development under construction have been significantly impacted. In many cases, developers are at risk of holding vacant units that otherwise would be on their way to full capacity. The absorption of these units, especially throughout the summer months, may take much longer depending on the nature and extent of the ongoing economic contraction.

The full economic effects of COVID-19 may not become evident until later this year. Because the current time for filing an assessment appeal in Virginia has passed, property owners will be more focused than ever on what happens to their next assessment on January 1, 2021. Disruptions in rental income, payment delinquencies and vacancy rates will be Exhibit A of the challenges to valuations in next year’s assessments.