According to the Court of Auditors, the “overly complex” process for the establishment of cadastral databases by the tax authorities “produces an outdated and unfair situation” and the judges at the Court stated that the Tax Commission was already concerned about the obsolescence of databases and their disconnection from the economic reality... in a report published in 1989.
It is obvious that this problem has now been compounded to such an extent that the overhaul heralded by the revision of rental values for non-industrial business premises, which was initiated in 2010 – the first assessment of which would result in significant transfers of costs between taxpayers – is proving hard to implement. We could wager that the same will apply to the revision of rental values for residential premises, which is scheduled to come into force in 2018.
In fact, only the method for valuing industrial premises does not form the subject of reform, insofar as it is based on a mathematical calculation and adapts mechanically to changes in market prices.
The methods for assessing rental value are even more important given that this theoretical rental value is used to determine real estate tax, charges for the removal of household waste, corporate real estate tax and local residence tax.
Assessment of the rental value for industrial premises
It should be stated at the outset that the notion of industrial premises naturally covers premises in which processing and manufacturing activities, strictly speaking, are carried out, as well as certain premises in which handling activities or the provision of services take place, where the technical facilities, equipment and tools used are significant and play a prominent role in the business. Without opening a debate on the content of the notion of industrial premises and the scope of case law criteria, the reader will appreciate learning that the majority of logistics warehouses, to some extent mechanised and equipped with cold stores, are now classified as industrial premises by administrative jurisdictions.
The application of this valuation method, known as the accounting method, consists of determining the rental value of the property based on the cost price of recording fixed assets liable for real estate tax in the assets (land, structures and fixtures and fittings) recorded in the owner’s or the operator’s balance sheet.
The rental value of properties liable for real estate tax is determi¬ned by applying a rate of 8% for land and, for structures, a rate of 9% or 8% depending on whether they have been purchased or created before or after the 1st January 1976. This rental value forms the subject of an annual update based on a coefficient adopted by parliament.
The assessment of rental value for non-industrial business premises and residential premises in accordance with current rules
Article 1498 of General Tax Code (CGI) outlines three assessment methods for the rental value of commercial premises, the reference date for which is 1st January 1970.
The method known as the “lease method” almost no longer applies as it relates to premises that were leased in 1970. On the other hand, the method known as the “comparative method” is the most commonly used and consists of assigning a given property or a portion of a property a rental value that is proportional to that which has been adopted, in the municipality’s records of revision operations, for other properties of the same kind used as typical or standard for comparison on 1st January 1970.
Finally, where these first two methods are not applicable, the rental value is determined using the method known as “direct assessment”, which consists of determining the estimated market value of the property on the reference date of 1st January 1970, adjusted using a specific reduction, to which an interest rate is applied, in order to obtain the rental value. The aforementioned rental value is subsequently updated using various coefficients.
As regards residential premises, article 1496 of General Tax Code provides for application of the comparative method as described above for commercial premises, but with different adjustments and weightings.
The main focuses of the revision of rental values for non-industrial business premises and residential premises
As regards non-industrial business premises, the reform specifies two valuation methods: the general method known as the “pricing method” and the residual method known as direct assessment. The pricing method consists of applying a price that is representative of the rental market, and not a price for comparable typical premises, to the weighted area of the premises to be assessed (possibly adjusted using a location coefficient). The prices will be determined on the basis of rents recorded in each valuation sector with a uniform rental market for each property category on 1st January 2013. The data used to set these prices originates from information declared by the owners of non-industrial business premises in the 6660-REV forms filed during the 1st six months of 2013. These prices will be updated by the tax authorities in line with changes in rents recorded each year (by means of information declared by those liable for corporate real estate tax in the DECLOYER form).
Should it not be possible to apply the pricing method, the residual method consists of applying a uniform interest rate of 8% to the market value of the property recorded on 1st January 2013 or on 1st January of the year of its construction, if this is later than 2013. This market value will be reduced by 50% for properties assigned partially or entirely to a public service or one identified as of general interest. The law outlines two accompanying measures for the rental value revision procedure:
- a neutralisation coefficient designed to maintain the respective weight of commercial and industrial premises in the databases for real estate tax, charges for the removal of household waste and corporate real estate tax, and which should lead to the reform being undertaken with consistent revenue for local authorities,
- a smoothing mechanism for five years of upwards and downwards variations in the databases for business premises, for which the revision of rental values will result in an increase of more than 10% and 200 euros in the contribution due. As regards residential premises, the revision of rental values, announced for 2018, is being trialled in five French departments with the reference date of 1st January 2015. The results are expected next autumn.
Although the financial impacts of the revision of rental values for non-industrial business premises cannot yet be assessed, it appears that it will result in significant transfers of costs between the various taxpayers, to such an extent as to justify another deferral of the entry into force of the reform, which is now expected in 2017 at the earliest.
Likewise, it will be necessary to monitor the financial impact of the revision of rental values for residential premises, to which all those liable for real estate tax and/or local residence tax – and therefore voters – should be sensitive.
Real Estate Newsletter - Option Finance, 1st june 2015
by, Cathy Goarant-Moraglia, avocat associé et David barreau, avocat