How assessment methods impact Idaho commercial property tax
Property taxes for homeowners skyrocked in recent years – dominating headlines in Idaho and discussions at the Legislature every winter, but homes are only part of the issue.
Commercial properties, like office buildings and your favorite retail store, also pay property taxes. But these properties haven’t seen the same big hikes in bills as residential homes. This is because, as BoiseDev previously reported, homes are rising in value faster than commercial real estate. This causes homeowners to take on a larger and larger share of the property tax burden while many commercial properties get a tax break.
In light of recent conversations about property taxes and commercial real estate, this deep dive into commercial real estate assessments examines how the properties are valued for taxes, what some of these properties are put on the market for and the difference between the two prices.
Lack of disclosure impacts commercial appraisals
Commercial real estate is a different ball game than residential properties.
When the Ada County Assessor determines the value of your home every year, the office has reams of sales data for similar and nearby homes provided on a voluntary basis by the Intermountain Multiple Listing Service. Anyone can see data on home prices and how they compare year to year or neighborhood to neighborhood, including what specific homes were listed at and what they eventually sold for.
This is not the case for the office building or big box store on your corner. While Idaho is a non-disclosure state for both commercial and residential properties, the lack of a requirement means most commercial sales prices don’t get reported to the assessor on the commercial side. Without the MLS providing data on commercial real estate, that means the vast majority of commercial properties change hands without the public, or the government, being able to find out what they sold for. This can make it more difficult for the assessor to accurately assess the value of commercial properties.
Ada County Assessor’s Appraisal Division Manager Erin Brady said the lack of disclosure creates an information “desert” for government officials trying to value commercial properties. This means the assessor’s office has fewer properties with final sales they can use to analyze their valuations for other properties, but Brady said with the small sample of sales for commercial properties her office has access to have a 97% appraisal level.
This means roughly half of properties assessed come in higher than what they are assessed at and the other half come in lower than their assessed value. But, even still, Brady said the smaller sample size available does impact their ability to assess property values accurately. It’s harder to say if that is having an impact on homeowners.
A graphic showing the shift in property tax burden from commercial properties on to residential. Courtesy of the City of Boise
“What we can say with certainty is that lack of disclosure constricts our commercial sale sample and, to an extent, our ability to base assessed values on statistically robust market information,” Brady wrote in an email. “How much (or little) that contributes to the implied tax shift to residential property owners is a much harder question to answer – but it probably isn’t a far stretch to conclude it may impact the distribution of tax burden between residential and commercial property types, at least somewhat.”
Internal sales databases, projected expenses drive assessed values
Another way commercial real estate differs from residential sales: How value is calculated.
When someone buys a commercial property, they frequently aren’t searching for a place to call home for their business. A major focus for commercial investment is often how much money a project can earn for the owner each month, whether it’s a multi-family housing complex or a retail building. This means the potential income the property can bring in is often estimated both by brokers and realtors trying to sell the properties and the assessors who try and estimate what they are worth for taxation purposes.
Peter Oliver, with Boise-based TOK Commercial Real Estate, said what properties are assessed for don’t even factor in when pricing commercial properties to list. He said because there is no disclosure, his company and others in the business keep their own internal data to see what similar properties sold for, called “comps.” These databases are not available to the general public.
“We collect comps,” Oliver said. “We have our own database. On the residential side, they have the IMLS, but commercial does not have that, so we compile our own comparables.”
Capitalization rates are another factor helping price commercial real estate. This is a measure dividing the net operating income for a property by its price, which tells you the return on investment you can get from purchasing a property. The lower a cap. rate, the higher the value for a property and vice versa.
Natalie Lemas Hernandez, a commercial real estate agent and owner of a property management company, told BoiseDev cap. rates are a big part of the equation. To calculate them, she said the commercial real estate industry and property management companies keep extensive internal databases on all the different costs a property could incur to best understand how valuable, or costly, owning a building can be.
“I’m also the owner of Commercial Northwest Property Management and we manage 3,000 units around the Treasure Valley and we have an entire database we can draw from,” Hernandez said. “We know what an 80-unit building in Nampa pays for snow removal and a 20-unit building in Boise pays for snow removal. We have a really good idea of how those expenses are going to shake out based upon our database.”
A tour through Ada County real estate
Let’s take a look at some recent commercial properties up for sale in Ada County to see their listing price, how it compares to their assessment and the process used to assess them. These properties were selected in no particular order or fashion.
Discovery Way office
The first is a 21,000-square-foot office building on Discovery Way in West Boise priced at $4.95 million, or $213 per square foot. An ad for the property touts a live work space, its desirable location near the YMCA and in the Boise Research Center. The most recent real estate assessment for the property shows it valued at $3,274 million, more than a million less than what it was listed for by TOK Commercial Real Estate.
The property paid roughly $34,000 in property taxes in 2017 and roughly $25,000 in 2021.
Courtesy of TOK Commercial Real Estate
Brady said a major factor for the building’s list price is it having “full service” leases, meaning the landlord pays all of the tenants’ expenses and is reimbursed for that with higher than usual rents. She said if you apply typical expenses to the property and measure it against market rents it would still be valued higher than what typical Treasure Valley commercial real estate agents advertise. She said the listing’s implied value could be higher “than the market will bear.”
This is just the listing price, not an actual sale price. It’s unknown what it will actually sell for.
“Listings are just askings – and you can ask whatever you want,” Brady wrote, describing the market in general. “It doesn’t mean it will come to fruition with a closed sale. Whether the listing leads to a closed sale, and how consistent the closed price is with the asking price, are truer, more reliable measures of the market. Most listings are reasonable, but we come across pie-in-the-sky ones pretty routinely, too.”
6th St. renovated home
Another office building up for sale is a single-family home renovated into office space on 6th Street near the Federal Courthouse for $685, or $370 per square foot. The listing boasts its proximity to the Military Reserve, its 2018 renovation that kept “classical features,” and the opportunity for an “owner-user” to purchase the property. It was most recently assessed at $455,000, again less than what it was put up for sale.
The property taxes on this building have stayed relatively level between 2017 and 2021, increasing from $4,270 to $4,521 in four years.
Courtesy of TOK Commercial Real Estate
Brady says properties like this one, which can be converted back to a residential home relatively easily can be “tricky” to assess because the possibility of it being a home makes it more valuable than a typical office or commercial building of its size. She said in the past, some properties have sold as commercial and been turned into homes after their purchase.
The property was originally listed at $805,000, but in recent weeks the price has dropped over $100,000. This matches Brady’s assessment of the property. She said the assessor’s office valued the property based on what similarly converted homes-turned-offices rent for in downtown Boise and she said the building’s initial listing price of over $800,000 assumes it is far more valuable “than anything we can support.”
Some commercial buildings are as small as single-family homes, while others are multi-story upscale structures.
Eagle View Landing building
A 73,000-foot office building near I-84 in Meridian in the Eagle View Landing office park developed by Tommy Ahlquist’s firm Ball Ventures Ahlquist is on the market for $25 million or $342 per square foot. The three-story building is located near a highway interchange, built in 2020, and is advertised as fully leased.
Courtesy of Lee & Associates
It’s assessed at only $1,483 million, multi-millions less than what it’s selling for. Both Brady and Ahlquist told BoiseDev this is due to the lag between when buildings are built, and their full value shows up on their assessment. At the time of the most recent assessment cycle, the building was only a partial shell. By 2023, it will be considered fully occupied and valued at $22 million, only $3 million less than asking.
The property paid just shy of $74,000 in property taxes in 2021. Because it is such a new building, there are no previous years to compare to.
Fairview dental office
Earlier this summer, a nearly 2,000-square-foot dentist office on Fairview Avenue west of Maple Grove was up for sale for $860,000. The property is currently assessed at $374,700, less than half of what it was listed for.
Brady said a factor contributing to the lower assessment versus the listing price is the tenant of the building and the long-term agreements the dentist has with the owner of the building. This individual circumstance might make the building more valuable, but she said the assessor’s office has to evaluate properties based on general trends. It is also unknown if the medical equipment was included in the asking price, which could hike its value.
“In reviewing the marketing info, this property has a long-term national tenant with rent escalators in place,” Brady wrote. “We can’t assess property based on the strength of the current/actual tenant – we have to assess to what is typical – the typical tenant at the typical rate.”
Courtesy of Google Maps
Property taxes on this property have remained stable, only decreasing slightly from $3,744 in 2017 to $3,595 in 2021.
Former windshield shop
Closer to downtown, the 2,000-square foot former location of a windshield repair shop on the busy corner of Fairview and Orchard Street is also up for sale for $795,000, or $415 per square foot. The building has a requirement that the purchaser doesn’t operate it as an auto glass shop for two years after the sale closes, but it is for sale by owner and offers extra commission if an agent fetches a full-price offer for the building. It’s currently assessed for $563,000, over $200,000 less than its listing price.
Property taxes on the property declined from $5,460 in 2017 to $5,138 last year.
Courtesy of Intermountain Auto Glass
Brady says this building being sold by owner in the hopes of finding an owner to occupy it for their business instead of marketing it to people searching for a property to boost their income could impact pricing. She isn’t totally sure, but she thinks it could be marked higher than what it should be in comparison with the rest of the market based on estimated expenses, nearby rents, and the cap rate, or estimated return, on the building.
“I’m not going to stick my neck out so far to insist it’s over-priced but based on what the neighboring property recently sold for ($690k for almost 7000 sqft), it might be?,” she wrote in an email.