Shopping Centers Today

MAR 2017

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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42 S C T / M A R C H 2 0 1 7 ONE OF THE MORE DAUNTING challenges facing shopping center owners today is that taxes are increasing as the value of their properties goes up. And this is not because of any increase in net operating income, but because of cap-rate compression. "It's a perfect storm," said J. Kieran Jennings, a managing partner of Cleveland-based Siegel Jennings. "Property taxes are going up at the same time individual retailers are feeling a greater pinch from online sales, evidenced by The Limited Stores closing all its shops and Macy's shuttering 68 stores and terminating 10,000 positions." Still, though values go up while cap rates go the other way, it will not be easy for shopping center owners to pass any additional expenses onto tenants. But Jennings suggests that one solution is to keep assessments from climbing to the level of the purchase price. "As cap rates come back, the sales of the centers will slow down," he said, "but the assessments based upon that old data will continue to stick." Even if the market has not peaked, it is probably close, based on the longevity of cycles. The purchasers of any shopping center at or near the height of the market will probably have to hold their property a long time or lose money. Meanwhile, some tenants will naturally close their doors, and leases will run out, and if any shopping center ownership has not managed its taxes well, it will be difficult to compete for new tenants or to retain the current ones. "Cap rates will decompress at the same time net operating income goes down, and if you aren't in front of your assessments, getting it rightsized, you are going to be in trouble," said Jennings. "You need to fight to get your assessments lower." When landlords are faced with these difficult tenant situations, with a Sears or a Macy's closing, it is important to get property-tax assessments reduced, says Stephen Paul, a specialist in property tax law at Faegre Baker Daniels. Accomplishing this can be tricky, though, especially if the empty space gets backfilled. Paul points to one prosperous mall that lost a Nordstrom, though the landlord was able to attract a nonretail tenant to the space. The Nordstrom had been a huge draw, however, and without that presence, other retail tenants took a hit. But this, Paul says, represented an opportunity to approach the local assessor and explain the changed circumstances. "Most mall rents are determined by the income of the stores, which is one of the methodologies used in valuing these properties," Paul said. "You can argue that values have declined because of the loss of income to other retailers. The assessor, on the other hand, will

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