Rethink How To Value Property

Unprecedented environmental challenges have not only altered our physical landscape but also the landscape of property ownership and taxation. Climate change, with its far-reaching consequences, is not merely a subject confined to scientific discussions and policy debates. Hurricanes, floods, wildfires, and storms and their impact on property damage and tax revenue have become impossible to ignore. In the face of these challenges, communities need to rethink how they value property to reflect the very real risks posed by climate change. This adjustment in property assessments is not only a response to environmental factors but also a crucial step toward ensuring fiscal stability.

Homeowners Are In Danger of Losing Their Homes

Residential properties are becoming unaffordable in areas affected by extreme weather because insurers are no longer willing to risk the total loss of the home. 

In Florida, frequent hurricanes and the inability to secure affordable flood and hurricane insurance have rendered buying a house on the coast untenable for many. The dream of coastal living has turned into a financial nightmare for some homeowners: “…in much of Florida, homeowners are increasingly struggling to buy storm coverage. Most big insurers have pulled out of the state already, sending homeowners to smaller private companies that are straining to stay in business. . . .”

The nation has watched as California battles an escalating wildfire crisis. The risk of owning a home in the midst of a fire-prone landscape prompts serious reconsideration. In May 2023, State Farm, California’s largest homeowners’ insurer announced it would stop offering coverage across the entire state, not just in high-risk areas.

Tellingly, the insurance crisis is not relegated to Florida and California: “In parts of eastern Kentucky ravaged by storms last summer, the price of flood insurance is set to quadruple. In Louisiana, the top insurance official says the market is in crisis and is offering millions of dollars in subsidies to try to draw insurers to the state.”

As the effects of the climate crisis spread and flooding and wildfires become so common that homeowners face exorbitant insurance costs or are no longer able to insure their properties, the regions most heavily affected urgently need policies that offer climate-impact solutions.

Impacts on Commercial Properties

The effects of climate change are not confined to residential properties; commercial properties are also weathering a newly complex scenario. Companies are reevaluating their relocation decisions, avoiding areas where natural disasters are becoming more common, or where the perceived risk of climate change impact is high. In August 2023, Moody released a report that revealed how climate is affecting commercial rental and insurance rates in high-risk zones like Miami (increased retail rental rate of 1.4% and increased insurance rate of 7.5%. between 2017 and 2022) and Denver (increased of retail rent of 0.4% annually in the same time frame and increased insurance rate of 9%).

Besides insurance and rent costs, business owners also consider the negative impact of frequent disruptions to utilities, transportation, and supply chains in disaster-prone areas, which diminishes commercial property values. Moreover, natural disasters can have a domino effect on the local economy, affecting the consumer base and workforce availability, which, in turn, impacts the profitability of commercial enterprises.

Government Taxation Responses to Climate Change

Governments at various levels are taking proactive steps to address the far-reaching impact of climate change on property ownership and taxation. Property tax, a cornerstone of municipal and county revenue, is coming under scrutiny and preserving the current tax base while ensuring the sustainability of the future tax base has become a critical endeavor.

One key strategy for achieving this balance lies in the promotion of green building practices and the implementation of strategic tax incentives:

• Density and development incentives for developments that prioritize climate-resilient features, such as green roofs, permeable surfaces, and flood mitigation infrastructure. These incentives aim to encourage sustainable development practices while providing financial relief to property owners who invest in climate resilience.
  
  
• Green building incentives for buildings that meet green building standards, such as LEED certification, encourage sustainable construction practices. These incentives not only protect long-term property tax revenue but also contribute to a more climate-resilient built environment.
  
  
• Property tax credits for homeowners who invest in climate-resilient upgrades, such as reinforced structures, fire-resistant materials, or flood mitigation measures. These credits provide financial relief to property owners while promoting climate adaptation.
  
  
• Green bonds - In certain regions, governments are exploring the issuance of climate resilience bonds, the proceeds of which are used to fund climate adaptation and mitigation efforts. These bonds, issued through Property Assessed Clean Energy Programs (PACE), are repaid through property tax assessments, placing the financial burden on property owners.

These policies protect building stock against flooding and fires, focus on reducing climate change effects in the long term, and help alleviate the increased cost of upgrading existing structures with new materials.

Green Roofs - CHUTTERSNAP on Unsplash

Valuation Methodology and the Assessor's Role

While the core valuation methodology for property tax assessment may remain largely unchanged, the impact of climate change requires a shift in perspective. Assessors need to consider not just the current value of properties but also the long-term sustainability of their tax base. The role of assessors is evolving beyond data verification to include an educational component. Assessors must educate property owners and local communities about the implications of climate change on property values and taxation.

Taxing emerging green technologies and infrastructure presents unique challenges. Consider a solar roof or charging infrastructure for electric vehicles. Traditional property tax models may not be well-suited to assess these assets. This necessitates the development of new tax models that incentivize green construction while ensuring fair taxation.

The role of actionable data has a growing influence over the ability to accurately and effectively tax properties in the climate crisis era. Over the past few years, for-profit services like Moody’s ESG Solutions and Archipelago and nonprofit research groups like First Street Foundation and Rhodium have evolved to quantify the physical risk of an asset.

The nexus of green building, tax incentives, green infrastructure, and the evolving role of assessors is a critical aspect of adapting to the new normal imposed by climate change. These strategies not only help maintain the tax base but also contribute to building resilient and sustainable communities for the future.

Conclusion

As climate change makes certain areas less desirable for property ownership, it triggers a fundamental reevaluation of what and how we tax. The impacts of climate change on property values require governments and assessors to be nimble in adapting to changing realities. It's not merely a matter of taxation; it's a question of ensuring the fiscal stability of communities in the face of environmental challenges.