Light industrial set for a heavy property tax hit

Light industrial set for heavy property tax hit

Burden shifts to flourishing sector as jurisdictions update assessments
Monday, May 10, 2021
By Barbara Carss

Spiking property tax tolls on light industrial facilities are considered a near certainty for ratepayers in Calgary and many municipalities of British Columbia’s lower mainland. Economic fallout from COVID-19 is shifting more of the tax burden to this flourishing group of assets via the mill rate, while also driving up the tax rate — presenting a double-whammy of consequences in jurisdictions that update valuations annually.

The assessed value of Calgary industrial property has risen 6 per cent, on average, against a 5.5 per cent drop in value across the entire non-residential tax base, bringing dramatic tax increases for some properties even before any tax rate adjustment comes into play. Industrial values have likewise increased in the range of 10 to 15 per cent in Vancouver and surrounding municipalities, while office and retail values have slipped about 5 per cent.

“The valuation date for the 2021 assessment roll was July 1, 2020, just a few months after the March lockdown here, but there was no real pause at all that we observed in rental rates or in valuation parameters for industrial properties,” David Howard, senior director, property tax, with Altus Group in Vancouver, reported during a recent online discussion of industrial property tax trends in three markets experiencing a boom in the warehouse/distribution and logistics sector. “So we’re in an environment now where we have one property type increasing significantly and other property types decreasing.”

Meanwhile, Ontario’s postponed reassessment will insulate property owners in the Greater Toronto Area from a similar shock in the short term. Many commercial and industrial ratepayers should actually enjoy a tax decrease this year following the Ontario government’s commitment in last fall’s 2020 provincial budget to harmonize the business education tax (BET) tax rate at 0.88 per cent for 2021, equating to an estimated $450-million tax cut province-wide. Nevertheless, property tax specialists warn of a looming spike in light industrial assessment rates with the first post-pandemic evaluations.

“We’ve seen property values increase 100 per cent from 2016 (the base date for the last assessment) to today, and with hotel, office and retail performing less strongly, this shift in tax burden is going to be real,” observed Jason George, vice president, property tax, with Altus Group in Toronto. “If you’re projecting taxes three to five years out and you’re assuming a 3 to 5 per cent annual increase, you are going to be in for a big surprise.”

New shifts come on top of Calgary’s five-year trends

Calgary’s most recent shift in apportionment is layered on previous destabilization that saw downtown office values diminish from 32 per cent of the non-residential assessment base in 2015 to just 18 per cent by 2019. In turn, the City of Calgary ratcheted up the tax rate to balance out the loss of approximately $250 million in revenue due to that drop in value, thus redistributing that tax burden to all other non-residential property classes.

“From 2016 to 2019 we saw a 56 per cent increase to the non-residential tax rate,” recounted Josh Weber, senior director, property tax, with Altus Group in Calgary. “The City had to look at how to fix this problem because there was no view in sight for increasing the assessment base or seeing downtown values come back.”

A solution — moving a larger share of the total tax burden to the residential tax base — was adopted for the 2020 tax year, resulting in a 12 per cent cut to the non-residential tax rate last year. However, a subsequent drop in most non-residential values necessitates an 7.3 per cent upward readjustment for 2021.

“Last year’s gain is close to washed out,” Weber lamented.

Compounding that are varying but generally consistent year-over-year gains in value for both A and B grade industrial assets. It’s estimated that 54 per cent of properties are in line for tax increases of up to 10 per cent solely attributable to revenue-neutral tax shifts, while another 35 per cent can expect a 10 to 20 per cent jump.

That’s nearly 4,800 properties out of a total of 5,300. In addition, there are 400 outliers set for tax increases greater than 20 per cent, including 119 properties that will see spikes in excess of 30 per cent.

Notably, among properties of 100,000 square feet or larger, Altus reports A grade facilities registered an average 24 per cent year-over-year surge in assessed value, while B grade facilities posted a smaller, but still sizeable 13 per cent year-over-year average uptick. Weber theorizes that’s linked to 17 transactions of light industrial properties last year, or roughly double the usual trade volume.

“Essentially, this has come down to a specific class of property that is really going to be witnessing the brunt end of this increase,” he said. “With the increase in sales, the City has gathered more market intel. Typically, sales in Calgary come in around $500 million in total value and this year we came in at $880 million.”

The city of Calgary has committed to provide some tax relief again in 2021 through its non-residential phased tax program (PTP) — a measure first invoked in 2017 to counter some of the tax shift from downtown office buildings to other types of non-residential properties. This year, a $13-million pot has been allocated to hold increases to the municipal portion of the tax levy to no more than 10 per cent above the amount calculated in 2020, excluding any PTP credit advanced at that time. Businesses defined as having experienced “the most significant property tax increases for 2021″ will be eligible.

“For the property owners who are experiencing heavy increases on the tax side, this has been a way to mitigate that when there are no other answers to be had,” Weber reflected. “The problem is, a component of it comes from the City’s rainy day fund and we just don’t know how long that’s going to last, or where it comes from. The sustainability is just really not known.”

Tax class designation a key factor for B.C. ratepayers

In B.C.’s lower mainland, David Howard notes that assessors generally applied higher rental rates and lower cap rates on warehouse/distribution facilities this year to derive year-over-year per square foot value gains in eight of nine municipalities surveyed. Only Vancouver remained on par with 2020 assessed value at $380 per square foot, while assumptions of double-digit rental rates and sub-four per cent cap rates — previously common only in Vancouver — underpinned jumps of 5.2 per cent to 16.8 per cent elsewhere.

“As you move away from the city of Vancouver and out into the Fraser Valley, this is where we’re observing increases on average of about 15 per cent,” Howard said. The average increase was below 10 per cent in Burnaby, Chilliwack and Abbotsford, and above 12 per cent in Richmond, Delta, Coquitlam, Langley and Surrey.

For ratepayers, much will depend on whether properties are categorized in Class 5, which specifically covers manufacturing and distribution uses, or in the catchall Class 6 for other business purposes. Additionally, since municipalities set two distinct tax rates for the two classes, other discrepancies can come into play separate from assessment-related tax shifts.

This year, warehouses in Class 5 will typically experience more moderate shifts since value increases have occurred more uniformly across the entire tax class, whereas warehouses grouped with other kinds of commercial properties in Class 6 are more likely to get walloped. For example, Howard cited a Surrey warehouse that sustained an 11 per cent year-over-year assessment-related tax increase due to its Class 6 status.

“The tax rate there (in Surrey) is already lower for Class 5 and we’re forecasting it to decline even further so that same warehouse, if it was in Class 5, would have taxes that are 18 per cent lower than the warehouse that is Class 6,” he advised. “It’s very important for the owner or taxpayer to know which class they are in and to audit that class to make sure it is accurate. It’s BC Assessment that establishes the tax rate classification based on use of the property or at least on what they feel the use of the property is.”

Looking ahead to 2022, he foresees more of the same when values are re-pegged to a July 1, 2021 baseline. Industrial sales prices over the past 10 months have generally surpassed properties’ assessed values, and recent leasing deals are also resulting in higher rents than assessors assumed last year.

“Again, if you’re an industrial warehouse that’s Class 6 and you’re grouped together with retail and office, I’d be concerned,” Howard cautioned. “I don’t think the same increase in value is occurring for those property types.”

Stability for the short term in the Greater Toronto Area

Jason George likewise traced an upward trajectory for light industrial sales values and rental rates in the Greater Toronto Area. Average net rent increased from $7.43 per square foot in 2018 to $10.33 in the first quarter of 2021, while average sales prices rose from $217.19 per square foot to $310.16 in the same time period. However, property tax is still apportioned according to assessed values from January 1, 2016.

“In short, there will be no swings in tax burden for the 2021 tax year,” George affirmed.

This year represents the fifth year of an originally intended four-year assessment cycle, and the 2021 Ontario budget, released in March, announced plans to stretch it still further. COVID-19-related upheaval prompted the initial postponement of the 2020 reassessment, which would have pegged assessments to values as of January 1, 2019. That reassessment has now been pushed until at least next year as the provincial government continues an ongoing review of property assessment and taxation, meaning that new evaluations for tax apportionment purposes won’t be in place before 2023.

“Shortly after the pandemic took hold here, the Province announced that it was going to postpone the reassessment to maintain stability. So stability has turned out to be a blessing for industrial properties that have seen quite significant increases in value,” George acknowledged. “Stability is probably not very good if you’re in hospitality or some retail sectors. In those cases, you’re not looking for stability or for your taxes to be based on 2016 market values.”

Looking to the future, he foresees many light industrial facilities will be taxed on par with suburban office buildings once the delayed reassessment occurs given that values for the two property types are now unprecedentedly in accord. He also suggests that the 2016 post-reassessment fallout for the high-end commercial strip along Toronto’s Bloor Street holds ominous portent for owners of warehouse/distribution and logistics facilities.

“Retail rents were increasing dramatically — $300 per square foot and even higher — and then when the assessment roll was returned, those properties saw 100 per cent increases,” George said. “This is likely going to happen to industrial properties the next time these properties get reassessed.”

Barbara Carss is editor-in-chief of Canadian Property Management.

Leave a Reply

Your email address will not be published. Required fields are marked *