Property Tax and the Real Estate Market
One of the most hotly debated topics coming out of the Government of Jamaica Budget for the 2017/2018 fiscal year is the significant increase in property tax consequent on the combination of increase in land valuations and a change in the rate of tax. In addition to highlighting the increase in the property tax, we should analyse issues such as whether the tax is equitably charged, whether valuations are fair and whether the formula applied for property tax will upset any particular dynamics in the real estate market.
Prior to this, property tax was a minimal expense for property owners; such that many non-compliant property owners could usually afford to pay many years of outstanding taxes in one swoop. Compliance was usually triggered by a change of ownership event, such as a sale or application for title under the law of adverse possession. There were two factors which influenced this state of affairs: (i) the unimproved value of land on the tax roll was usually many years out of date (which means that the value was usually low. According to the website of the Local Authorities of Jamaica, in recent times, valuations were completed in 1992, 2002 and 2013); (ii) the tax rate was more or less uniform (in 2008 it was a flat rate of 0.5% assessed based on 2002 valuations, and in 2013 the rate was increased to approximately 1.5% for properties valued at $1,000,000 or less and approximately 2% for properties valued in excess of $1,000,000, based on 2002 valuations). The prevailing state of affairs was that, for the most part, property tax was not a contentious issue.
The Property Tax (Amendment of Schedule) Order, 2017 was published in the Gazette dated March 7, 2017. Pursuant to this Order, effective April 1, 2017 property tax is now levied in 9 value bands; with a progressively higher tax rate applied to properties of higher values. Under this Order, the tax rates are lower but the property valuations are higher.
For example, Band 3 covers properties with unimproved values $800,001 to $1,500,000. In this band, the property tax is calculated as follows: (a) $1,000 tax on the first $400,000 plus (b) 0.80% tax on the next $400,000 plus (c) 0.85% tax on every dollar thereafter. For a property with unimproved value of $1,500,000, the effective tax rate is 0.677%.
Band 6 covers properties with unimproved values $4,500,000 to $7,000,000. In this band, the property tax is calculated as follows: (a) $1,000 tax on the first $400,000 plus (b) 0.80% tax on the next $400,000 plus (c) 0.85% for the next $700,000 plus (d) 0.90% for the next $1,500,000 plus (e) 1.05% for the next $1,500,000 plus (f) 1.10% for every dollar thereafter. For a property with unimproved value of $7,000,000 the effective tax rate is 0.91%.
The net effect of the new tax rate combined with application of a more recent valuation roll is that, the actual dollar amount payable for property tax on properties of commercial value that will likely impact economic activity have increased significantly. In some cases, the increase has been 200% and even 300% when compared to the amount that was due for the fiscal year 2016/2017.
In light of the fact that the valuations applied to a large number of properties have increased exponentially relative to the 2002 valuation, there is significant concern as to whether the valuation method used was fair and reasonable. Since the objective of assessing “unimproved value” is to assess the value that the land could be sold if the improvements were disregarded, should all lands in a certain community/area have the same unimproved value? Is steep hilly land worth the same as flat neighbouring land? Are lands which cannot be developed into strata complexes because of restrictive covenants worth the same as neighbouring lands in respect of which the covenant has been modified or which are not so restricted? If the valuations are not fair, then the burdens placed on some property owners would be inequitable.
While it is clear that the Government of Jamaica has budgeted for increased revenues of $3.93 billion from the increased property tax (from compliant tax payers), it is also useful to think about and analyse the implications that the significant increase in property tax will have on the real estate market. As I am not an Economist, I will leave it to those professionals to offer opinions as to whether they believe this increase will have a contractionary or nil effect on the real estate market. What I will do here is highlight the kinds of land transactions that property tax will affect.
The Property Tax Act, 1903 provides that property tax is payable every year in respect of all properties in all parishes. This tax is payable by the person in possession of the property. Under the Tax Collection Act one of the remedies available to the Tax Collector where property tax is outstanding is that he can levy distress on the goods and chattels of occupiers. Based on these provisions, a tenant is liable for property tax in respect of the premises that he occupies. The Tax Collector could also seize and sell his goods in order to enforce payment. However, the landlord is also exposed in the event that property tax is outstanding. This is because, outstanding property tax is a first charge and lien on the property. The Tax Collector may, therefore, sell the property to recover the taxes or is entitled to first payment from any proceeds of sale.
In light of the fact that property tax is now a significant annual expense, it will need to be a relevant factor considered in the setting of rental rates or re-imbursable expenses. Lease Agreements should specifically address this issue and should state explicitly the agreement between the parties as to who should pay the property tax and how increases will be absorbed. If, for example, the landlord has the obligation to pay pursuant to the Lease Agreement, but the Tax Collector levied distress on the goods of the tenant, the tenant will be able to claim compensation or indemnity from the landlord for breach of leasehold covenant. If, the tenant has the obligation to pay and fails to honor that obligation, the landlord will be able to establish a claim against the tenant.
The Rent Restriction Act, broadly speaking, was enacted to protect tenants. This Act limits the rate at which rent may be increased for properties that fall within the scope of the Act. Specifically, it states that rent ought not to be increased by more than 7 ½% per annum, unless there were substantial improvements in the amenities or locality or structural improvements or increase in rates and taxes (other than water and sewer rates). This means that the increase in property taxes, if the tax was computed as included in the rent, can trigger a widespread increase in rent, for both commercial and residential properties, in the island. If the tax was not computed in the rent, it would be payable by the tenant, anyway. Additionally, for new rental properties the standard (or starting) rent should be higher than it was last year, because property tax is one of the relevant factors considered in the computation of rent. Will the drastic increase in property tax lead to socio-economic or economic imbalance because of how it could affect tenants, including tenants protected by the Rent Restriction Act?
In a transaction for the sale of real estate, the title transfer cannot be completed until the property tax is paid up. A mortgage institution will not issue a commitment letter indicating that they will lend a purchaser money to acquire a property in respect of which the property tax is not paid up-to-date. In the near future, will we see an increase in bridging loans taken out by vendors who have accrued property taxes and cannot afford to pay?
Have we considered though, what the dynamics would be if a large number of property owners are not able to afford the tax for a sustained period of time, and as a result many properties are put up for sale? Could we have a glut in real estate? I raise this concern because it seems, from anectodal observations, that there is a disconnect in some respects between the valuations and actual market information, or at least the information used by citizens to make past decisions about where they can afford to live or do business.
The Parochial Rates and Finance Act, 1900 provides that all property taxes, interest and penalty thereon are to be paid into a Parochial Revenue Fund. The beneficiaries of this Fund are the parish council and municipal corporations.
Property taxes are now quite substantial; in some cases, more expensive than maintenance fees paid to maintain strata properties. Perhaps the time has come for property owners to start demanding more from their parish council and municipal corporation in terms of the maintenance of parochial roads, garbage collection, street lights, etc. This will be a mutually beneficial relationship, as with better parochial services, our quality of lives will be improved, property values will be maintained and so tax revenue will remain high. We should hold our local governments accountable to deliver increased levels of services commensurate with the increases in property tax.
Andrea Scarlett-Lozer is a Partner at Myers, Fletcher & Gordon, Attorneys-at-law. She specializes in Commercial Transactions and Advisory, as well as, Intellectual Property law. Andrea is the Head of the firm’s Intellectual Property Department. She may be contacted via firstname.lastname@example.org or www.myersfletcher.com.