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Wednesday, 13 April 2011 18:52

Merchants fear higher rent in fallout from rising commercial property values

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Despite its vibrant façade, downtown Waynesville hasn’t been immune to the economic recession.

So Richard Miller was surprised, to put it mildly, when he learned his downtown building doubled in value over the past five years — at least according to the county’s appraisers. Miller disagrees with their assessment.

The book value of Miller’s building on Main Street went from $431,000 to $800,000 in the recent countywide property revaluation.

Property values determine property taxes: the higher the value the higher the tax. And that’s what concerns Miller.

If his taxes go up, he’ll have to charge more in rent to cover the cost.

“Could the businesses stay in business if they had to pay that much more in rent?” Miller said. “I’m afraid one of my tenants would leave if I said rent goes up by that much a month.”

The Kitchen Shop and the Blue Owl art gallery occupy Miller’s building at the corner of Main and Church streets.

Most commercial leases automatically go up if property taxes go up, thanks to a clause built in to the lease for just this occasion. Merchants will then have little choice: either absorb the rent hike or pass it along in the form of higher prices to customers.

“The result? Fewer customers, fewer purchases, less profit, more overhead, and more and more doors closed,” said Jonnie Cure, a free market advocate and past downtown property owner. “Too many businesses come and go on Main Street in Waynesville as it is in this horrible economy.”

The steep increase witnessed by commercial property is the exception to the rule in the property revaluation. Residential homes and land largely went down, or at best increased slightly.

Canton saw significant hikes to commercial values as well: a 13 percent increase overall for the downtown district. If higher property taxes force up rent prices, it could break small businesses, said Charles Rathbone, owner of WNC Sign World in downtown Canton.

“The business owners here could not as a rule support that kind of increase,” said Rathbone. “They are struggling every day to keep the light bill paid.”

Rent is cheap in downtown Canton compared to Waynesville, but merchants are still operating in the margins, Rathbone said.

On average, property values in downtown Waynesville went up 28 percent, with the larger jumps seen on Main Street. Miller said Main Street has been singled out.

“Why is Main Street being punished for being successful?” Miller said.

Downtown Waynesville is a selling point for the whole county, said Buffy Phillips, director of the Downtown Waynesville Association.

“We are clearly doing something right,” Phillips said. “Realtors always say if they have a buyer who is on the fence, they drive them down Main Street to close the deal.”

It doesn’t seem fair that their success resulted in such large jumps in property values, which in turn will hurt the very merchants who are the life blood of downtown’s vibrant scene, Phillips said.

Main Street storefronts remain in high demand, however. Downtown Waynesville has only a handful of vacant storefronts, with only a couple on Main Street itself.

While downtown Canton has generally been flush with storefronts for lease in recent years, several have been snatched up lately. New downtown business that have just opened or are coming soon include a computer shop, an office for an outpatient physical therapy provider, an automotive shop and a new restaurant.

“It is beginning to fill,” Rathbone said.

 

What it means for taxes

In downtown Waynesville, higher property values carry a potential triple whammy: they not only determine county and town taxes, but also a special assessment to support the Downtown Waynesville Association, a self-promotion arm for downtown merchants.

Phillips said DWA will likely lower the tax rate in the Main Street district. That means that even though property values went up, the amount paid in taxes won’t go up by the same percentage.

At the county and town level, however, commercial property owners who saw their values go up shouldn’t expect a lower tax rate to offset the increase.

On average, property values flat lined. Although some obviously went up while others went down, the total value of all the property in the county is the same after the revaluation as it was five years ago.

 

How commercial is calculated

Commercial property is valued differently than residential homes and land. The values for homes and land are based on sales of similar property. But there are usually not enough sales of commercial buildings to establish an accurate baseline.

“It is hard to find commercial properties that are truly comparable,” said Ron McCarthy with RS&M Appraisal firm.

So instead, commercial property values are derived from the prevailing rents in an area. Even if the property isn’t being leased, appraisers calculate how much rent income the building would potentially generate if it was.

While residential homes and land were appraised by an in-house team of county appraisers, the county contracted with a private firm, RS&M Appraisal, to do commercial property.

Regardless of the rent-based appraisal formulas, Miller disagrees with his assessment. Rents have not gone up 28 percent in five years, so why did property values, Miller asked.

 

On the rise

Commercial property values increased in the latest Haywood County property appraisal. Here’s the increase for certain districts compared to five years ago.

Waynesville downtown: 27.9%

Canton downtown: 14.6%

Maggie Valley downtown: 8.8%

Clyde downtown: 3.8%

Russ Avenue in Waynesville: 9.5%

South Main Street in Waynesville: 3.6%

Champion Drive in Canton: 26.7%

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