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Commercial Real Estate in New Jersey is Rented Despite Property Taxes

Many factors are behind why economist labeled 2012 as the year residential real estate finally had recovered and wasn't in danger of another slow down. However on the commercial side of the house, things are not as rosy due to a glut in available commercial properties. Yet in spite of the various issues facing commercial real estate, analysts have been surprised to find while most companies are renting instead of owning,property tax revenue rose in 2012.

Important Revenue Source

While both businesses and homeowners alike would rather not pay this tax, it is one of the main revenue sources for cities and counties. On average,property taxes account for 34% of state and local government revenue. Additionally many states, like Washington, also levy a real estate excise tax, which makes the sale of real estate an important revenue source as much as owning it.

With the downturn in the economy, all levels of government felt the pinch in a two-step sucker punch. As people lost their jobs, many lost their homes. This was aggravated by the fact many of these homes were overvalued due to the housing bubble. While these inflated values were not sustainable, the property taxes brought it had helped spur government growth and projects. With this revenue gone, local governments had to drastically cut back on projects and services.

Commercial real estate also took a hit as less people with jobs meant less people buying products and services, which led to lay-offs and plant closures. Worse was prior to the housing bubble collapsing, was an increase in commercial real estate building. With the economic slow-down, many of this new retail or industrial space lay vacant.

Why the Rise in Property Tax Revenue?

While 2012 had a significant increase in new home construction; much of it is still working to catch up to historical levels. On the commercial real estate side, there has been little progress as the economy is only starting to fill the vast pool of empty commercial states.

Due to worries about the economy, both here and in the European Union, have many companies renting properties rather than buying. Even with low interest rates, most continue to rent as this gives them more flexibility. So with more renting rather than buying, how could property tax rise in 2012?

The reason is twofold. The first is simply the lag in reassessing property values. Most local governments do not do this frequently. With the lost of so much revenue making deep cuts in local governments, these assessments are often pushed back further. However the change in property value the tax is based on can be startling.

In early 2012 Guilford County in North Carolina (home to the city of Greensboro) conducted their first county wide property reassessment since 2004. To the shock of homeowners, there was an average drop of 12.6% in home values. In many ways examples of steep drops like this gives municipalities even more reason to put off doing their periodic reassessment. So while residential and commercial real estate has lost value, it has not been officially documented in most parts of the country yet.

The second reason is local governments have been adjusting tax rates in order to stem the loss of revenue. As property values fall, municipalities increase the over-all tax rate so the amount paid remains constant. This policy has the side effect of increasing the effective tax rate on the property so property taxes actually rise slightly.

Economists hope as the economy heats back up, more homes and commercial real estate properties will help offset the eventual readjustment in property values across the nation.

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