ADRIAN POWER-KELLY takes us through the issues surrounding rates on commercial properties.
For businesses and local authorities, revision of the commercial rates regime in Ireland is an increasingly important topic. It was a topic that emerged before the General Election and, because some businesses have seen their rates bill increase by between 50 and 100% at a time when trade is declining and market rental values are falling, it is not likely to go away soon. Commercial rates are an important source of income for local authorities, netting them €1.25bn each year, and providing local government with 26% of its annual income. Rates on 43,000 properties net €620m for the Dublin local authorities.
For occupiers of commercial property in the past, rates represented approximately 13-17% of occupation costs, although this varied between property types and county council areas. More recently, as the economy has changed, rates can now represent 50% or more of occupation costs. For local authorities and businesses, getting the rating system right is hugely important.
How is the rates bill calculated?
There are two elements to a rates bill. First is the ‘rateable valuation’. This is the notional rental value of a property assessed by the Valuation Office. This value usually remains fixed unless the property is physically altered, for example if it is extended or if previously unused sections of the property come into use. Second, a multiplier is decided each year at the local authority’s budget meeting. This is derived from the number of commercial properties in the area and the budget the local authority estimates is required to provide public services over the next year. This is expressed as a percentage of the rateable value. In Dun Laoghaire, for example, it is set at 17% of the value of the property, and charged annually. Thus, the rates bill is made up not only of the rental value of the property, but also of the budget of the local authority in which the property is based. As construction activity has fallen, so income to local authorities from development contributions has also fallen, and local authorities have looked to commercial rates to make up the shortfall in income. This failure by local authorities to balance their books is the reason why commercial rates have risen so fast in some parts of Ireland.
The Valuation Act 2001
A national revaluation of all commercial property in Ireland began in 2005, following the introduction of the Valuation Act in 2001. So far, this has been undertaken very slowly, on a county-by-county basis, and has covered South Dublin County Council, Fingal County Council and, most recently in December 2010, Dun Laoghaire-Rathdown.
One of the problems faced by the Valuations Office and businesses is that the statutory valuation date has been September 30, 2005, i.e., approaching the peak of the market in 2006. Since then, economic conditions in Ireland have deteriorated and, in many cases, the rateable valuation of the property is significantly higher than if the current market rental value had been adopted. On the one hand, businesses are reducing their overheads to remain competitive, but on the other hand they see their rates bill increasing as local authorities try to balance their books.
Given the speed with which the property market and the economy have changed, and the slow pace of revaluations, it is now more important than ever that the Valuation Office is properly resourced and a national revaluation undertaken so that all properties are valued to today’s market values. We suggest that a more contemporary valuation date in 2010 or 2011 should be used. This should be part of a complete overhaul of local government funding, so that the cost of replacing lost income from development contributions is not completely borne by the business sector.
During better times, many businesses paid little attention to their rates liability. But now that trading conditions are difficult, they are correct in scrutinising all their expenses and questioning the rateable valuation. However, the Valuation Act 2001 is restrictive about allowing an existing rateable valuation to be re-assessed where the statutory appeal period has elapsed. It is worthwhile getting professional advice at the outset to ensure that everything is in order.
That said, it should be noted that, on appeal, a rateable valuation can be increased so there is a particular need for caution, and for obtaining a professional analysis of the rateable valuation, before taking action. In this latter regard, it is particularly important that any business should ensure that it uses a rating consultant with appropriate qualifications and experience, such as members of the Society of Chartered Surveyors Ireland, who operate under specific rules of professional conduct.
The issue of rates and their burden on commercial operations shows the speed with which the economic environment has deteriorated and a comprehensive updating of the current valuation process is required to ensure fairness. As the burden of rates becomes ever more heavy for struggling businesses, many will be asking – where to from here?
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Adrian is the Principal of Power-Kelly & Co., Chartered
Valuation Surveyors, a member of the Valuation
Professional Group of the Society of Chartered
Surveyors Ireland, and has 30 years’ experience as a
valuation surveyor and rating consultant.