They claim many municipalities are using taxes to prop up their failing administrations and not providing the mandated services.
Commercial property owners feel they are being bled dry by municipalities which they claim are unfairly increasing their rates and taxes to make up for their own mismanagement.
An ailing and overtaxed commercial property market – already hard hit by Covid-19 – says it has been left to “carry the bulk of the burden of sponsoring local authority costs with very little return”, says the Western Cape Property Development Forum.
Slamming the “excessive” salaries paid to City of Cape Town officials, forum chairman Deon van Zyl says “local authorities have, over time, structured their financial models on the over-taxing of the same sector – businesses which are also responsible for job creation, payment of national taxes, VAT and generally keeping the economy working”.
He says the “golden goose” of commercial property can no longer fund the local authority business model that is “not underpinned by the principles of efficiency and client service”. And the fact that some municipalities are in a “financial calamitous state”, means nationally commercial property owners will continue to fund them at an ever-increasing rate, says Neil Gopal, chief executive of the SA Property Owners’ Association.
The latest Auditor General (“AG”) report is “critical and damning” of most municipalities and indicates “extreme abuse of the public purse”, with many municipalities having dysfunctional control environments, high levels of corruption and a culture of unaccountability.
“Only 20 municipalities received clean audits and only 2% of the municipalities are fully complying with legislation. “(Commercial property owners’) assets sit in these failing municipalities where they contribute significantly to the rates base for services which should be commensurate to the rates you pay.”
Gopal says many municipalities cannot control their finances and that runaway expenses are directly related to the “unjustifiable increases” in revenue from property rates. “What we have seen is that municipal revenue streams are on the rise with respect to the three main cost components for property owners, being property rates and water and electricity payments.
“Municipal financial mismanagement – which I highly doubt will improve – is directly related to the increase in these costs.”
FNB commercial property economist John Loos says property owners often feel they are being taxed too highly but the issue of service delivery being relative to the rates and taxes charged on both commercial and residential properties should be the crux of the matter. And in this regard, one “cannot generalise” and say that all property owners are taxed too much or that all municipalities offer fair services in return.
“Rates and taxes on commercial and residential properties have to be relative to the services the town receives. In some areas the service delivery is good, and is therefore contributing to the area, and therefore property values while, in others, it is bad. “We know that, in many areas, the rates and taxes have risen tremendously and in many of these areas service delivery is not good.”
The opinions on rates and taxes, says Loos, are often subjective but he notes some services supplied by municipalities are for the benefit of poor communities, such as infrastructure in poor areas. These benefit areas as a whole and so may not be seen directly by commercial property owners.
“Rates and taxes have to be judged relative to the service delivery received and that does differ quite widely from council to council.” Echoing this, Gopal says each city has different challenges and they differ significantly at many levels, which include such factors as populations, density, unemployment, crime, homelessness and budget deficits. As such, service levels would differ and would not be easy to compare.
However, the association’s experience shows that, in areas of rezoning approval processes and rates, for example, Cape Town “fares better than most other cities”. “Investors will naturally be attracted to cities which are governed better, where there is less corruption, where rates and taxes are fair and transparent, where the rate of return is better, and where a municipality is run efficiently.
“Where municipalities are using property rates and taxes as a means to balance their books and without justifying these increases, and furthermore not reducing their expenses, investors will likely be discouraged to invest there any further.” A bigger issue, Loos believes, is that of property valuations.
“One has to work on getting the valuations right. You cannot have two similar properties with two very different values. So it is not always about being charged too much but about the inconsistency in property values.” Gopal says Sapoa is cautioning investors to consider their future plans carefully.
“The auditor-generals’ report into the state of municipalities is a good gauge for this decisionmaking process.” In the Western Cape, municipalities “have evolved” into the habit of taxing commercial properties at least double residential properties, says Van Zyl. This may have evolved from the thinking that commercial properties attract people and therefore cause excessive service obligations for municipalities. But the reality is “far different”.
“More and more commercial properties are having to provide for themselves certain services that would have traditionally been provided by municipalities, such as refuse removal, security and guaranteed utilities.
“Add to this the fact that municipalities are charging developers development levies under the auspices that developers should carry the cost of bulk infrastructure service, and one cannot but come to the conclusion that municipal taxes and the rating practices will have to be reviewed.”
In addition, increasing numbers of unforeseen operational costs are being placed on commercial landlords for services such as fire management. “This is at the same time that the City of Cape Town refused to guarantee water pressure to commercial properties for firefighting services. It is placing an additional cost burden on property owners as well as the insurance industry.
“One cannot but come to the conclusion that commercial properties are being over-taxed on all fronts,” Van Zyl says.