Southeast Real Estate Advisor : Atlanta Real Estate Lawyer & Attorney : Kevin Caiaccio Law Firm : Commercial Development, Retail Leasing : Buckhead, Sandy Springs, Georgia

Last week, Senate Majority Leader Chip Rogers introduced a major overall of the property tax system in GA.  Senate Bill 346 (PDF) was drafted in response to the perceived unfairness which has resulted from falling home values.  Despite the significant drop in property values, assessments for tax purposes have remained artificially high.  This problem was well documented in a thorough report in the AJC late last year.

The comprehensive bill proposed by Sen. Rogers includes over 40 changes to the property tax system and will have a major impact on GA property owners.  Some of the highlights of the bill are as follows:

• Requires the county to send annual assessment notices on all properties along with information on how to file an appeal.  The current system only requires a notice if the assessed value is changing.
• Allows the property owner to file an appeal up to one year after receiving the assessment notice. This is probably one of the more controversial provisions of the bill.  Current law requires the owner to file an appeal within 30 days.
• Requires unanimous approval by the Board of Equalization to approve a value higher than that claimed by the property owner.
• Requires that the market value for tax purposes not exceed the sales price for the first year after an arms-length sale of the property.

 My initial thoughts on this bill are as follows:

Pros:   would create a more consistent, objective and fair system by shifting some power to the homeowners;  would simplify the tax appeals process.

Cons:  would increase administrative costs to counties; would likely result in reduced revenues unless the counties take the unpopular step of raising millage rates; could delay the approval of the tax digest and make budgeting more difficult;  could hurt schools which derive much of their revenue from property taxes.

Bottom Line:  I like the fundamental policy objectives of this bill, but some of the finer points will need tweaking. 

Sen. Rogers has indicated that the bill will not be fast tracked and that he is seeking wide input on the bill.  As result, the proposal will likely go through many iterations before reaching the Governor's desk. 

Because of the significance of these changes and the impact on GA property owners, I will continue to monitor this bill and provide updates as warranted.

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This morning I attended a breakfast seminar sponsored by the Atlanta Bar Association entitled "Leasing Issues in Today's Economy."  The panelists were three prominent Atlanta leasing attorneys:  Jonathan Neville of Arnall Golden Gregory, Robert Stanley of Stanley, Esrey & Buckley, and David Kitchens of Kitchens Kelly Gaynes.

The discussion centered on current issues in retail leasing.  The panelists did an excellent job of highlighting issues from both the landlord and tenant perspective. 

Here are some of the takeaway bullet points from this informative seminar:

• For a tenant seeking rent relief in this market, short-term relief is often a more viable option.  Longer term rent relief is less palatable to the LL due to the detrimental effect it has on the shopping center's value.
• A tenant seeking rent relief should be current on its rent when approaching the LL.  Many institutional LLs have a policy against negotiating with tenants who are behind on rent.
• Tenant improvement allowances are a hot topic in lease negotiations.  Because so many LLs are struggling, the tenant must protect itself from a LL who is unable make a TI payment.  The tenant should insist on either having the TI dollars escrowed with a third party and/or the right to offset unpaid TI from future rent payments.
• Co-tenancy clauses continue to be a point of contention in negotiations and are frequently being litigated.  (See my recent post on this topic.)
• Due to the increasing number of foreclosures, it is more important than ever for tenants (even smaller tenants) to insist on a subordination, non disturbance and attornment agreement (SNDA) with the LL's lender.  This will protect the tenant's rights under the lease in the event the lender becomes the owner through foreclosure.

The current economic climate continues to drive lease negotiations in many ways.  Not only is the leverage shifting in favor of creditworthy tenants, but certain issues have become increasingly important as both landlords and many tenants continue to struggle financially.

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There seems to be conflicting reports concerning whether the proposed tax increase on carried interests remains alive in Washington.  The proposal passed the House in December, and its fate is now in the hands of the Senate.  According to reports last week, the proposal appeared to be dead for this session.  However, the Administration's budget released just this morning includes this tax increase.

The issue is whether carried interests should continue to be taxed at the lower capital gains rate (as they are under current law), or taxed at the higher rate for ordinary income.  If passed, the bill could more than double the tax liability for real estate professionals who are compensated with a promoted interest in a partnership or LLC.  

The proposal originally gained popularity after reports of hedge fund managers who made enormous sums of money and were being taxed at a lower rate than ordinary working Americans.  While most of us are unsympathetic to wealthy hedge fund managers, the problem is the unintended effect that this tax increase would have on the real estate industry.  Many real estate ventures, both large and small, are structured such that the promoters receive a carried interest in exchange for know-how and sweat equity.  

As noted in this ICSC report , compensation of real estate managers is fundamentally different from hedge funds and private equity.  In the case of RE promoters, the income from a carried interest is not guaranteed, and there is often a longer hold time before any profits are realized.  Moreover, the promoters are often required to incur contingent liabilities in the form of loan guarantees. 

As a matter of public policy, the proposed tax increase comes at a terrible time.  Commercial real estate is already struggling, and this bill would create a disincentive for further risk taking and could lower property values even further.

If policymakers intend to help stem the decline in CRE markets and the resulting damage to the overall economy, this bill should be voted down or amended to limit its applicability to fund managers.

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