As Vancouver considers approving its biggest property tax increase in more than a decade, tax experts say the measure could severely damage local businesses, which are already operating in a challenging environment.
City council is currently considering a draft of its 2020 operating budget that would increase property taxes by just over nine per cent – a significant spike compared with the 2.8-per-cent yearly average increase registered between 2010 and 2019. A final vote on next year’s budget is planned for Tuesday’s council meeting.
Tsur Somerville, an associate professor of real estate finance at UBC, notes that retail tenants tend to be very sensitive to shifts in property taxes.
“I think that’s the sort of place I’d be most concerned about how these property-tax hikes play out,” he said. “Particularly retail tenants, where they’re paying the property taxes, not the landlord, and on properties where the values are very, very high because of redevelopment value.”
Paul Sullivan, a senior partner at real estate consulting firm Burgess Cawley Sullivan & Associates, is also concerned about the city’s approximately 78,000 small businesses, saying the proposed tax increase would “have a significant effect” on them.
Much like in the residential sector, tax bills for commercial properties are calculated by multiplying the assessed value of the property by the applicable tax rate. But commercial leases are usually structured so that tenants – not owners – are responsible for paying property taxes.
And under the province’s property value assessment rules, a property’s potential “highest and best use” is what’s used to determine its value. This means that retail businesses in busy areas with a high potential for redevelopment can be hit with substantial spikes in their costs in a short amount of time, even before taking into account rising rent payments. Rents for retail spaces have increased by 12 per cent over the past four years, according to a recent City of Vancouver staff report.
“That practice of requiring tenants to pay the property tax is, of course, outlawed in the residential side of real estate. But it’s still allowed in the business side,” said Alex Hemingway, an economist and public finance policy analyst at the Canadian Centre for Policy Alternatives, a left-leaning think tank.
“When you see a property increase significantly in value, perhaps due to a new community plan or rezoning, the commercial landowner is benefiting enormously from that increase in the land value," Mr. Hemingway said.
“We should actually be looking at starting to require them to pay for their own property-tax bills, rather than shunting it off onto small-business tenants.”
But Mr. Sullivan said that change would be very difficult to enact.
“You’re trying to change the entire commercial real estate market. … If you’re going to try and impose that kind of legislation on the marketplace, you’re going to create chaos in the form of litigation.”
In its proposal, the city uses the example of a business property valued at the median of $976,000. The city says the extra taxes the business would pay under the changes would amount to only $404 a year, including higher utility fees.
But Mr. Sullivan calls that “extremely misleading.”
“There’s no such thing as a commercial property at a million dollars,” Mr. Sullivan said, explaining that the assessed property value for a typical community retailer would be closer to $3.6-million.
“So that tax increase is more like $1,500, and $1,500 compared to, you know, $200 for a million-dollar home, that’s outrageous. So yes, it’s gonna have a dramatic effect,” he said.
Mr. Sullivan said covering those cost increases would require businesses to sell an additional $30,000 in goods or services at a 5-per-cent profit margin, which most businesses aren’t making in the first place.
“They just keep loading up the business side, and that’s what’s gone on for decades. And now we’re seeing such high valuations, there’s no chance that our local independent businesses can survive.”
The Union of B.C. Municipalities has flagged the need for changes in how commercial properties are assessed and taxed.
Selina Robinson, Minister of Municipal Affairs and Housing, has said the B.C. government is examining some potential solutions.
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