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The Gallagher Amendment and Colorado’s tax landscape

By James Simpson, Associate – National Valuation Consultants, Inc.
Colorado Real Estate Journal – August 4, 2020

Since its 1982 enactment into the Colorado State Constitution, the Gallagher Amendment has served as the balance for which residential and non-residential property taxes are distributed.  At its core, the amendment stipulates that residential assessments can comprise no more than 45% of the state property tax base, while non-residential (commercial, industrial, vacant & agricultural land, natural resources, and state assessed property) make up the remaining 55%.  Further, under the amendment, non-residential assessments remain fixed at 29% of market value, while the residential rate “floats” so that the 45% and 55% split is upheld.  In other words, the residential assessment rate is the lever by which the Gallagher equation is held in balance.  However, Colorado lawmakers are increasingly crying “foul” as the intended balance is placing a disproportionate burden on businesses, overly stressing municipal budgets and forcing officials to make deep cuts to already challenged local community resources.  How did we get there?  Let’s take a moment to explain.

When initially implemented, the residential assessment rate began at 21%.  This has since plummeted to the current 7.15% rate, due primarily to the significant growth and subsequent residential value boom across metropolitan Denver.  As a result, the marked decline in the residential assessment rate has resulted in roughly $35 billion in tax relief to Colorado homeowners since 1983. While the average front range homeowner may be unaware of these tax benefits due to the recent meteoritic rise of front range home values, it is the rural areas of Colorado where, much to the homeowner’s delight, the effects of the Gallagher Amendment have been most pronounced.  According to Michael Van Donselaar, Director of Property Tax at Duff and Phelps, rural areas of Colorado depend heavily on activities such as natural resource extraction, and unlike the Front Range where values have spiked since the recession, the same has not held true in such rural parts of the state.  Furthermore, sustained business activity across the Front Range has hedged against residential property tax cuts; however, for more rural areas that have experienced far less growth, the combination of stagnant residential values and declining residential assessment rates (which are uniform statewide regardless of one’s location) has resulted in a significant reduction to tax revenue at the local level.

Now 38 years after becoming law, the Colorado legislature is once again attempting to repeal Gallagher (a repeal effort in 2003 failed by a large margin).  However, following the recent approval from both the House and the Senate, the November 2020 ballot will be the first opportunity for Colorado residents to have their final say on the issue.

If a repeal were successful, Mr. Keith Erffmeyer, the Denver County Assessor, said that the specific tax landscape post-repeal remains speculative.  According to Erffmeyer, what is known is that a repeal of the Gallagher Amendment would effectively freeze assessment rates at 7.15% (residential) and 29% (commercial) due to a companion bill, Senate Bill 223, that accompanied the recent approval.  Future legislation could alter these rates; however, the Tax Payer Bill of Rights would prevent any increases in the assessment rates without a subsequent vote from Colorado residents.

Conversely, should Colorado residents vote down the repeal, Erffmeyer echoed the fear espoused by the bipartisan legislature currently promoting the repeal efforts; namely, the residential rate could continue to decline as a result of sustained home value increases, while the COVID-19 pandemic places historic downward pressure on non-residential (commercial) values.  The result?  The state’s property tax administrator estimates a residential rate decline from 7.15% to 5.88%, which would render a $491 million cut for school districts statewide and a $204 million cut for county governments.  All this in a time where businesses are failing, and government coffers are reeling.

To date, the 5.88% estimate for the residential rate is just that, an estimate.  However, since residential and non-residential property types are reassessed in odd-numbered years, the waning effects of COVID-19 on the real estate assessment landscape could make the 2021 reassessment that much more challenging, whether or not the Gallagher Amendment repeal survives.  It is important to note that 2021 assessed values will be based on an effective date of June 30, smack at the tail-end of the COVID-19 pandemic.  Those familiar with the current commercial real estate market are aware that COVID-19 has stalled many commercial real estate transactions, as the gap between buyer and seller expectations of value widens.  The result has been a dearth of sales data leading up to the June 30 date of value.  While many professionals within commercial real estate valuation acknowledge a decline across commercial values during the pandemic, obtaining substantive sales data to prove this assertion creates quite a conundrum for assessors in the upcoming reassessment cycle.

Unfortunately, once the COVID-19 pandemic subsides and normal market activity resumes, sales that occur beyond the effective date of value and assumedly point towards a general decline across commercial values (some property types presumably faring better than others), could trigger a record number of appeals from building owners come spring of 2021 when the assessed values are released, notes Erffmeyer.  He revealed that several plans are being considered to combat the potential issue, though none are concrete enough to report at this time.

While there are many arguments for and against the prior effectiveness and future appropriateness of the Gallagher Amendment, there’s little debate that the current pandemic is putting local municipalities in a tough spot.  Without question, the efficacy of the Colorado legislator’s repeal efforts will impact Colorado’s commercial real estate landscape for years to come and, while several different outcomes are possible, the sustained burden that Gallagher continues to place on local government and community resources should make a caution case for the voting public to at least consider the repeal.


How COVID-19 has Changed this Year’s Summer Travel Plans

By Will Fehr, Associate – National Valuation Consultants, Inc.
Colorado Real Estate Journal – July 15, 2020

It comes as no surprise that in the midst of the ongoing COVID-19 pandemic the hospitality industry has struggled mightily with the sharp reduction in nonessential travel. From vacant hotel parking lots to frequent notices of cancelled conventions, the anecdotal evidence is clear. Even more clear is the actual evidence of an ailing industry: According to the June 13 weekly report published by Smith Travel Research, hotel occupancy in the U.S. was 41.7%, as compared to 73.7% in the same week in 2019, a 43.4% drop. Further, the average daily rate of $89.09 is 33.9% lower and revenue per available room is $37.15, a 62.6% decline from the same period in 2019.

Based on statistics compiled by the Metro Denver Economic Development Corp., local figures specific to the metro Denver region paint an even more dire picture as the local average hotel occupancy rate fell 59.3% year over year to 15.7% in the month of April (most recent data available). For the same period, the average daily hotel room rate fell to $84.38, a decrease of $57.24 per night.

And it’s not just hotels. Convention centers remain vacant. Some casinos have gone dark. Local excursions are cancelled, and airlines have cut multiple routes. Denver International Airport reported only 299,000 total passengers in April and 13.33 million total passengers year-todate 2020, a staggering decrease of 94.4% and 34.3%, respectively, from the same periods the prior year.

So, cancel the summer vacation. Call off the reunions. Might as well home school through the summer. Right? Not so fast, says one enclave of the travel industry. Let’s go RVing!

In the face of the overwhelming negative data facing hospitality, travel and recreation, the recreational vehicle industry has seen an uptick in demand and a newfound opportunity to gain market share. With safety being top of mind during this time, most vacationers are choosing to hit the road rather than the skies.

“Due to fears associated with high-density travel via airplanes and cruise ships, it is expected that COVID-19 will lead to an increased interest in RVing due to its inherent ability to promote social distancing. This conclusion is also further supported by the recent surge in RV rental and sale demand,” stated an asset manager with a national portfolio of RV camping sites and manufactured housing communities with transient sites available to RV owners.

According to a study conducted by Kampgrounds of America, 34% of prospective U.S.- and Canada-based campers say that road trips will be the safest form of travel as stay-at-home orders have been lifted. Amid coronavirus concerns, the RV Industry Association also found that 20% of U.S. residents surveyed have become more interested in RV travel versus flying, tent camping, cruises or rental stays.

As many states throughout the union gradually have lifted stay-at-home orders, RV dealers have seen a sharp increase in purchases. Thor Industries, one of the largest manufacturers of recreational vehicles in the U.S., has seen increases in RV sales over the past couple of months as evident by its Airstream line, which reported an 11% increase in sales between May 1 and May 21 as compared to the same period last year. Moreover, a recent study by Thor indicates that 39% of people surveyed said they would be using their RVs more often this year. The study also found that 78% of potential RV-ers will purchase a RV this year, while 18% of current RV owners also will be purchasing another RV.

Importantly, the state of Colorado could be set to benefit from this new shift in vacationing preferences as it contains several National Parks, campgrounds and RV sites, and is widely known for its outdoor activities. On May 11, Colorado Parks and Wildlife announced plans to start opening the state’s parks and campgrounds. In addition, Rocky Mountain National Park began welcoming visitors on May 27. The park has opened approximately 60% of the park’s maximum parking capacity or 4,800 vehicles (13,500 visitors) per day.

But it isn’t only the state and national parks taking advantage as the private sector also is benefiting. In speaking with representatives at Winding River Resort RV Park in Grand Lake, management stated that overall reservation activity has been “through the roof.” Since reopening in mid-May, it has been operating at or near full capacity despite being unable to conduct its normal food services. Most summer weekends are fully booked, and the resort is even getting reservations for next year. Similarly, Management at the Cripple Creek KOA in Cripple Creek indicated that total RV reservations for June are up a total of 11% compared to the same time last year. While July reservations are only up 4% year over year, August reservations have increased by a massive 43%.

Although the COVID-19 pandemic has resulted in considerably less air travel and fewer hotel stays, the underlying desire for travel has not gone away. Rather, it has caused travel demand to shift from airlines and hotels to RVs and campgrounds. So, while owners and shareholders within the hospitality and travel industry stand on the sidelines with legitimate concerns about the future of travel, growth in RV usage has created a boon for recreation vehicle manufactures, owners of RV resorts and manufactured housing communities with transient sites and amenities. Resort property owners are poised to reap the benefits as demand drives increases to reservation fees and monthly lease rates. So don’t call off the summer vacation quite yet. Fire up the old RV, pull the wheel chocks and let’s roll!