Consider Seeking Lower Tax Assessment If Tenant Pays Below-Market Rent

In these tough times, landlords need to find ways to turn lemons into lemonade. One example is considering whether the lemon of the tenant who’s paying below-market rent might yield sweet lemonade in the form of a reduction in your property tax assessment. This recipe has worked for many property owners, and it might just work for you.

If you don’t believe us, you can ask the Denver owner whose retail property was appraised at $3.7 million based on a market rent of $4 per square foot. The problem was that the current tenant, K-Mart (which would later end up in bankruptcy), was paying only $2 per square foot in rent. To make matters worse, the lease had been in effect for nearly 25 years and K-Mart had the option to renew it for another 10 years. So, the owner went to the Colorado Board of Assessment Appeals and asked for a reduction in its assessment. The Board obliged, reducing the assessment to $2.5 million.

The city appealed, but the appeals court upheld the reduction. The presence of a long-term tenant paying below-market rent would have an adverse impact on the property’s sale price, the court reasoned. As a result, the board’s decision to cut the assessment was correct [City and County of Denver v. Board of Assessment Appeals of the State of Colorado, No. 91SC775, 1993 WL 59311 (Col., March 29, 1993)].

Takeaway: If you’re fetching below-market rent, you may be sitting on a potential tax break that you shouldn’t miss out on. Look at your current property tax assessment and the rental rate on which it’s based. If there’s a significant gap in a negative direction, you might have a strong case to challenge the assessment. Be sure to point out that you’re collecting below-market rent and be prepared with evidence to prove it in making your case to the assessment board or appeals tribunal. Although there are no guarantees, your efforts could end up saving you millions of dollars in property taxes.