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By Paul Diamond
The reluctance of many CFOs to take a tax loss on surplus property is resulting in increased carrying costs for their unused properties, as well as creating blighted areas in many of our cities and rural areas. There were already numerous vacant sites on the books of many companies before the Great Recession began, due to the movement of jobs overseas. The recent economic crisis has only made the situation worse. Our cities and rural areas are dotted with vacant buildings, many of which have minimal market value, regardless of where we are in the economic cycle.
The severe slump in the real estate market makes it particularly unlikely that many of these vacant properties will be sold for their existing intended use or redeveloped for other uses. In their present status, they are merely magnets for vandalism, theft, and other problems. Cities throughout the country are taking aggressive steps to help insure that the vacant sites do not create blight. For instance, Chicago requires that vacant properties be registered with the city and that semi-annual registration fees be paid. Additionally, there are very specific requirements imposed upon owners for securing these sites. Merely boarding up the windows and doors with wood is no longer sufficient. Steel must be used to bar access to the buildings.
Moreover, in many cases, merely taking steps to bar access to a site proves to be inadequate. Security personnel must be posted around the clock, at great cost. Indeed, even security personnel often prove to be unreliable and unhelpful, causing further headaches. Many companies have found that their buildings have been stripped of valuable components, such as copper and electrical fixtures, even with security personnel in place. Many sites are just too large to secure.
How is this dilemma to be resolved? If a property cannot be sold, the owner should consider donating the real estate to a charitable organization, a governmental unit or some other not-for-profit entity. If an outright donation of the ownership interest in the real estate is not possible, it is useful to permit a not-for-profit entity to lease the real estate for a nominal fee. The mere occupancy of the site helps to eliminate many of the problems of vandalism and theft. It should also be noted that a prolonged failure to occupy a site may result in the zoning status of a site being jeopardized. Local zoning codes need to be reviewed in this regard.
Absent donation of the freehold or leasehold, CFOs should consider whether it is advantageous to merely demolish the improvements, leaving unimproved land. In this way, companies can reduce many of the carrying costs of vacant buildings. Real estate taxes are a key source of savings. Obviously, demolition of improvements on a site will dramatically reduce the tax bill, especially in rural areas, since only the remaining land will be subject to tax. Nonetheless, savings can also be had even if the improvements are not demolished. While some municipalities advocate increasing real estate taxes for vacant properties to "reimburse" the community for the frequent blight they cause and the additional expense that the vacancy causes local governmental units, it is still most often the case that real estate taxes are reduced for vacant buildings. While, as a policy matter, many argue that such tax reductions serve to reward bad behavior, particularly in those instances in which vacant sites are not maintained, in most cases, real estate taxes are reduced on a case by case basis.
Taxing authorities often take into account subjective factors, such as the effort that has been put into selling or otherwise causing the site to be reoccupied, noting that the loss and re-creation of jobs is a key political issue. In many instances throughout the world, however, the tax reduction is formulaic. For instance, until recently, in many parts of the UK, no real estate taxes whatsoever were assessed for vacant industrial sites. Additionally, no real estate taxes were payable for vacant office and retail sites for the first three months of vacancy, with half of the real estate taxes eliminated thereafter.
Demolishing the improvements on a site will also resolve a variety of insurance problems, since vacancies often jeopardize insurance coverage. For instance, many hazard insurance policies eliminate or curtail coverage to the extent an insured site is vacant, on the theory that it is easy for such properties to be looted and vandalized. It is imperative that the CFO review his or her company's relevant insurance policies in this regard.
CFOs must resist the urge to avoid taking a capital loss on these sites, as the current expenses of simply allowing these sites to lay vacant, with little hope of sale, is simply too expensive. CFOs are advised to take action sooner rather than later.
Paul Diamond is a partner in the Chicago office of the law firm Wildman, Wildman, Harrold, Allen & Dixon. He can be reached at
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