Denver is in the midst of a reassessment that could see values of some commercial real estate rise by as much as 50 percent.
The increased valuation, spurred largely by record sales of investment properties, likely will result in higher tax bills next year for owners of commercial real estate – and higher income for the city and county of Denver.
It’s a cost landlords ultimately pass on to tenants. Property taxes now average about $2 per square foot per year for tenants, said Pat Hilleary, vice president of operations for Brookfield Properties’ Denver office.
“Property taxes are an operating cost all landlords pass on,” said Hilleary, who also serves as president of the Denver chapter of the Building Owners and Managers Association. “The question is whether you prebill it. If a tenant leaves at the end of 2007 and you didn’t prebill that tax, there’s a huge additional payment required. It’s not fun to go back to a tenant and say, ‘You owe me an additional payment.”‘
Significantly more than half the office buildings downtown have sold in the past two years, according to a report by Frederick Ross Co. Some sold for at least twice their assigned value.
More than 18 million square feet of office space totaling $2.8 billion traded this year. That’s up from 11.7 million square feet traded for $1.7 billion in 2005 and 6.3 million square feet totaling $579 million in 2004.
“We’re seeing sales values that we haven’t seen in a long time, especially when you factor in what happened from 2002 through 2004, when you had a lot of buildings that were vacant,” said Jim McGrath, senior vice president and branch manager of Studley, a commercial real-estate firm that specializes in tenant representation.
Among the notable sales pushing values higher is Wells Fargo Center. The property had a 2006 assigned valuation of $127.2 million. It sold in March 2005 for $344 million.
Qwest Tower sold in June for $125.4 million. Its 2006 valuation was $60 million.
“We’re looking at some sharp increases in valuations based on market sales that have occurred during the study period,” Denver Deputy Assessor Ben White said.
But the values assigned to the buildings are not likely to be as high as what they sold for.
The assessor’s office reassesses all property every two years. Its current study will cover property performance in the period between Jan. 1, 2005, and June 30, 2006.
It combines three approaches to reach the value of the property:
The assessor’s office is required to send notices of value to property owners by May 1. Owners can appeal the assessments first to the assessor’s office.
If that appeal doesn’t produce a satisfactory result, the property owner then can appeal to the county board of equalization. If the owner still isn’t satisfied, the owner can go to the district court in his county, then through binding arbitration and ultimately to the state Board of Assessment Appeals.
“The bulk of the appeals do come through us,” said Diane Fechisin, administrator for the Board of Assessment Appeals.
The board handled 3,000 appeals in the 2003-04 period and expects to handle about 2,800 for the current cycle. Fechisin expects the number of appeals to increase for 2007-08.
“If a lease is really well negotiated, tenants will have rights to force landlords to contest the taxes,” McGrath said. “A lot of tenants don’t think about it, and in a lot of cases, landlords will say the taxes are what they are and pass it on to the tenant.
“Do the tenants get the benefit when the taxes go down? Some do, some don’t. Most of them on a full-service lease do not get the benefit.”
Staff writer Margaret Jackson can be reached at 303-954-1473 or mjackson@denverpost.com.
