Can your factory’s property tax assessment better reflect its true value?
By Caroline Miner, Manager, Complex Property Tax, Altus Group
Plant managers and equipment engineers work hard to maximize a facility’s production through efficient operations, necessary capital investment, and regular maintenance, and are rightly proud of the results. However, equipment and buildings wear out, production processes change, technology advances outpace capital upgrades – and through all that, property taxes are often a constant and significant budget item, seen as a non-negotiable cost of doing business.
Let’s change the thinking: property taxes are an agreement between a facility and the jurisdiction…and contracts are always negotiable.
Considering property taxes to be a contract with a taxing jurisdiction opens the door to thinking through strategies to reduce an overall cost to the plant. Treat property taxes as you would any other operating expense – by asking “how can we be more efficient, and lower that cost?” The result can be lower property assessments, driving direct tax savings and increasing plant profitability.
Step 1: Don’t limit your thinking
An effective property tax assessment review starts by asking the right questions. The basis for assessment in most jurisdictions is market value – the price at which you could sell your building or your equipment to a knowledgeable purchaser. However, assessors commonly use mass appraisal techniques, and equipment is actually assessed on depreciated original cost. As you might expect, there is often a disconnect between what the company originally spent, adjusted for typical wear and tear, and the true market value of used equipment or an older building. So, you need to ask a series of tough questions such as: if we aren’t operating at peak efficiency, why not? Is there something about the building, equipment or process that increases the frequency of repairs or replacement of components, or generates more down-time than typical? Are we “making do” with equipment on hand when there is a better/faster/cheaper option out there? Has supply of raw materials or demand for finished products changed in a way which impacts our operations? Thinking broadly about your facility’s specific operations in combination with its competitive position and the overall business climate can generate creative approaches to quantifying the gap between wear-and-tear depreciation and true market value.
Step 2: Leverage your data
Clearly, depreciation due to wear and tear is only part of the story. But how do you tell the other part of that story? Expand the conversation beyond the plant controller. Ask the utilities managers, ask the warehouse managers, ask the production floor leads what their pain points are and how they would fix them. Then, identify data that demonstrates the problem – or the solution. Operations departments maintain all sorts of useful metrics on equipment, utility use, capital spending and potential projects. Leveraging at-hand data specific to your facility is key to demonstrating additional depreciation or obsolescence on equipment and buildings.
In addition, manufacturing facilities don’t operate in a market vacuum – consider and incorporate broader market data into the conversation, such as pricing changes or technology advancements. Bring good data to the negotiating table, and you will have a receptive audience.
Step 3: Testing the impact and preserving success
Jurisdictions don’t have the time or resources to understand the variety of factors impacting your facility and operations. They have other concerns – equitable treatment of taxpayers, statutory frameworks and other rules and guidelines they must follow, pure volume of work with often limited staff. Treat any discussion of property assessments and valuation as an opportunity to educate and inform the jurisdiction team about your business. Be respectful of their time (and yours) by understanding the materiality of the adjustments you request. For example, changing the effective life of a major piece of equipment might impact your assessment for many years to come, where a temporary functional issue might only last a year or two while the equipment is upgraded or repaired.
An open dialogue around the issues identified during the review, how data was gathered, tabulated and applied in any calculations, and a clear understanding of the implications of any changes for both the facility and the jurisdiction will help preserve savings achieved through appeals. That same dialogue should be leveraged to establish awareness (on both sides of the table) of proactive steps that can secure future savings through reporting methodology or a data-driven obsolescence calculation.
Step 4: Everyone wins
Property taxes are an agreement between the plant and the jurisdiction; costs and benefits accrue to each party. Facilities pay taxes for the roads they need to deliver their products and the schools and parks they need to attract a stable employment base. Jurisdictions gain income and sales taxes from those employees, and in turn maintain vibrant communities. Contracts are always negotiable.
When handled by an alert and educated team, a careful evaluation of real estate, equipment, processes, and market environment can yield a successful property tax appeal based on a thoughtful approach and data-driven conversations. Successful negotiations and appeals drive cost savings directly to the bottom line, improving overall margins of the plant – and giving plant managers one more thing of which they can be proud.
About the Author:
Caroline has spent her entire career focused in state and local property tax issues. She has experience in a wide variety of property types and industries across more than 40 states, with a special focus on complex facilities in food & beverage, heavy manufacturing, professional sports, and senior housing. For more information about Altus Group, click here.