Change to property tax law stimulates some real estate deals

March 26, 2012 | Leave a Comment

 

Sunday, March 25, 2012

  • Large commercial real estate deals are already benefiting from changes to South Carolina’s property tax laws approved in 2011, while the impact on second-home sales has been limited.
  • photo

    Photo by Grace Beahm

    Changes to South Carolina’s property tax laws have given investors more confidence in new commercial developments. Here, Adam Monroe (left) and Ryan Knapp of Middle Street Partners visit the construction site for their 270-apartment complex in Mount Pleasant.

    “The projects that we have on the drawing board wouldn’t be on the drawing board” if the law hadn’t changed, said John Darby, president of The Beach Co., which has several large projects under way.

    The tax changes created an exemption for commercial properties, a category that includes second homes, that greatly reduces property tax increases that can kick in when properties change hands.

    The practice of reassessing a property’s value when there’s a change in ownership, commonly called “point of sale,” has been a thorn in the side of the real estate industry since it began in 2007.

    “We actually lost a sale last year for some multifamily (property) because of it, when they figured out how the taxes would go up,” said Charles Carmody, managing broker at CB Richard Ellis Carmody in Charleston.

    Under point of sale, property taxes can soar, cutting into the profits of investors, raising apartment rents and business leases and saddling second-home buyers with unexpected costs.

    Huge sale-related tax hikes were common when real estate values were rising, leading to the legislation last summer that created large discounts for commercial properties.

    Comfort factor

    Under the old rules, if a commercial property on the tax rolls valued at $2 million was sold for $2.5 million, the taxes would jump by roughly an equal amount, or 25 percent.

    photo

    Photo by Grace Beahm

    Site preparation work is under way for Middle Street Partners’ 270-unit apartment complex in Mount Pleasant.

    Under the new rules, that property’s taxes would not change because of the sale, and most commercial deals won’t trigger a tax increase unless the property’s value increased by more than 33 percent.

    “The day that tax law was changed, more likely than not, the value you could

    sell your property for was higher,” said Ryan Knapp, a partner at Middle Street Partners on Sullivan’s Island, which develops and invests in real estate. “It’s good for the state, it’s good for jobs and it’s good for the economy in our area.

    “It played a part in our out-of-state financiers being comfortable,” he said.

    Middle Street Partners is developing the 270-apartment Cooper River Village project in Mount Pleasant and has invested in projects elsewhere in the state.

    Darby of The Beach Co. said The Boulevard, a mixed-use project involving new shops and 325 apartments on Coleman Boulevard in Mount Pleasant, would have been unlikely to get financing under the previous tax rules. The firm broke ground on the project Tuesday.

    “That’s a roughly $40 million investment in Mount Pleasant,” Darby said. “It wouldn’t underwrite, the way the taxes were.”

    Darby said that when large projects are appraised for financing, any large tax increase associated with selling the property in the future would substantially reduce its value.

    photo

    Provided

    The Beach Co. broke ground last week for construction of The Boulevard, a roughly $40 million mixed-use project on Mount Pleasant’s Coleman Boulevard shown here in a rendering provided by the company. The 370-apartment and business complex may not have been possible, according to The Beach Co., without the changes in property tax regulations approved last year in South Carolina.

    “As far as The Beach Co. is concerned, we have four apartment communities that we plan to build in the state,” Darby said. “Each ranges from $30 million to $40 million, and none would have been underwritten the way the taxes were.”

    Elliott Summey, a vice president at The Weiser Companies, said he’s seen the impact of the new law first-hand.

    With commercial properties such as shopping centers, the previous rules resulted in large tax increases that were passed along to tenants in the form of higher rent, in some cases prompting tenant businesses to move out, he said.

    As an example, Summey pointed to a project he’s

    been working on for two

    years involving a major retailer that plans to open a store in the Charleston region. When the property tax law was changed, a large concern of the retailer was removed in the midst of negotiations, said Summey, who would not name the company involved.

    “They said, ‘Hey, we want some guarantees about our taxes,’ ” said Summey, who is a member of Charleston County Council. “That discussion went away because of the point-of-sale changes.

    “In this market, every part of the discussion is important,” he added. “A deal can be killed over thousands of dollars, rather than hundreds of thousands.”

    More to come?

    How did the tax law change?

    Under the old rules created by Act 388, the South Carolina Real Property Valuation Reform Act of 2006, properties in South Carolina are reassessed when there is an “assessable transfer of interest,” which is usually a change in ownership due to a sale. This is known as a point-of-sale reassessment, and it can cause large increases in property tax bills.

    Last year, the General Assembly changed those rules to create a discount for commercial properties, including rental properties and second homes. The way it works is the property is still reassessed if there’s a transfer of interest, but then the new value is discounted by 25 percent if the owner applies for the “commercial exemption.”

    The discounted assessment cannot be lower than the assessment prior to the sale or transfer. The way the math works out, a property’s value would have to gain more than 33 percent to trigger a tax increase related to a sale.

    For example, if a $1 million property were sold for up to $1.33 million, and then the new value was discounted by the 25 percent exemption, the assessment would go back down to $1 million.

    With point of sale, the key factors are a property’s assessment before and after a sale. Assessments are taxable values assigned to a property by county officials,

    Berkeley, Charleston and Dorchester counties all recently conducted reassessments that used property values from the end of 2008.

    In most cases, property values are lower today than they were at the end of 2008, so point-of-sale assessments and relief from point of sale has played a muted role in the market for existing second homes.

    “I can’t say that it’s a big part of the conversation,” said Joe Salvo, broker in charge at Seabrook Island Real Estate. “It may be making a difference, but what people are really talking about are the changes in prices and economic conditions.”

    Salvo was among local real estate professionals who pushed hard for the General Assembly to change the law. He and others in the industry had been upset about reassessments since 2007, when the practice began as part of the statewide Act 388. The law created point-of-sale reassessments while slashing property taxes on owner-occupied homes and raising South Carolina’s sales tax.

    When real estate prices were rising fast, the policy meant big tax increases for some.

    “It’s certainly not such a big issue now,” Salvo said.

    Real estate industry associations continue to push for the state to reduce property taxes on commercial properties.

    “Point-of-sale certainly created a hindrance to real estate transactions, and what they did last year helped, but it needed to go further,” said Charleston real estate investor Christopher Price of The PrimeSouth Group.

    This year, the state House is considering a bill that calls for reducing the tax rate on commercial properties.

    “The impact of the point of sale reform has yet to be fully realized in South Carolina, but it was the first step in an ongoing tax reform process that will continue to make South Carolina and Charleston in particular an increasingly favorable environment for individuals, corporations and investors,” said Meghan Weinreich of the Charleston Trident Association of Realtors.

    Reach David Slade at 937-5552 and on Twitter at @DSladeNews.


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