Donald Bouchard, CREWe all have habits, don’t we? Some are seemingly life-long and become part of our make-up. They make us who we are in many cases and offer up a degree of predictability. Sometimes, however, we acquire new habits as circumstances around us change. It seems that this has happened to many of us as an outgrowth, at least partially, of the great recession. What habit is that, you may ask?
I am talking about the habit of almost never agreeing to pay “full price” anymore for just about anything retailers are willing to sell us! The NPD Group, an industry research firm agrees and said off-price buyers now account for 2/3 of all shoppers and that the apparel industry is particularly hard-hit by this change in consumer behavior. Discount stores are maintaining a customer base that they garnered when the recession hit. Evidently, many of us took to this new habit and are focused on getting the most for the lowest price. Good for us – bad for many retailers.
Switching topics, I want to offer some words of wisdom (so to speak) to property owners and their legal counsel in instances where property taxes are an issue. Property tax law is specialized and those attorneys who make a living at it understand the issues at a glance. Occasionally, however, an attorney who is not familiar with assessment practices but otherwise represents an owner, calls my office indicating that the property is wildly over-assessed due to the financial “anchor” of a below market lease. I recite the fee simple/market rent mantra and explain that most tax cases boil down to four variables: market rent, market vacancy, market based operating expenses and for income producing property, a market supported capitalization rate. While I take pity on an owner who is experiencing a diminished return on his investment due to a lack of rental revenue from an old lease, the fee simple format, and years of court decisions make market rent the only basis for income calculation. It’s always a surprise or a shock for the owner or attorney to discover that they have no sound argument because they are getting below market rents.
Let’s talk for a moment about condemnation. Eminent domain is one of the most powerful tools held by government, quasi-governmental agencies and some utility companies. Our state and federal constitutions both recognize the right of the sovereign to acquire private property, acknowledging that takings are sometimes necessary to upgrade our highways and infrastructure or to redevelop blighted areas. The key to the process is making certain that the property owner is paid fully for the property taken, so-called just compensation. It sounds simple, but condemnation can have enormous impacts on property owners because of other negative consequences that are not compensable under the law.
When the property occupied by a successful business at an established location is taken via condemnation, it is expected that the owner will be compensated for the loss of the real property. Taking authorities do offer relocation assistance, but what happens when the business has no option but to move miles away from the existing location, losing their key customer base, goodwill and any competitive advantage the prior location offered them? Their sales and profits can plunge and the process can and has destroyed companies. Unfortunately this happens time and time again but these “business losses” are not compensable in Massachusetts. Sorry Mr. and Mrs. Owner…you are out of luck on that one.
Alternatively consider what happens if the government eliminates the primary, highly visible access for a commercial property on a main road and instead leaves the site with circuitous access through a residential neighborhood from a side street? Once again the state wins and the property owner loses. Strictly speaking, damages stemming directly from the loss of this high quality access are not compensable. The premise supporting this view is that all the state has to provide is continued access to a public way. The quality of the access is not their problem. Once again, such actions can have a devastating impact on businesses and there is likely little recourse. Over 35 years in the real estate business, I have seen many such examples where these impacts can cause substantial hardship.
Oh yeah, and by the way, let me briefly channel the late curmudgeon Andy Rooney here. Why is it that if you pay your real estate taxes late, you pay 14% interest. If, however, they community owes you money and has to abate taxes already paid, they pay 8% interest.
More egregiously, when the state owes a landowner additional compensation in an eminent domain matter as a result of a challenge to the pro tanto payment, the interest rate payable is calculated based upon the weekly average one year treasury yield. The current one year yield is about 0.6%.
Moving on…my next column will likely be published around the time of, or just after the November election. I first voted in 1972. This will be my twelfth presidential election and the most truly bizarre one yet. In the early summer of 2015, at a luncheon meeting involving over 20 people, someone mentioned Trump and the sideshow that might present itself in the election process if he was actually serious about running. My bold comment to the group was completely dismissive. I spoke clearly and forcefully when I said “I will be elected President of the United States before Donald Trump.”
Well, I am not wrong just yet, but that old Chinese curse was spot on – “May you live in interesting times.”
Donald Bouchard, CRE is a senior vice president at Lincoln Property Company and is the 2016 chair of the New England Chapter of the Counselors of Real Estate.